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THE   RAILROAD   PROBLEM 


A   COLLECTION    OF    PAPERS   ON   VARIOUS   ASPECTS   OF   THE    RAILROAD 

PROBLEM    AND    PRESENTING    MANY    POINTS    OF    VIEW    AND 

CONTENDING  SUGGESTIONS  CONCERNING  ITS  SOLUTION 


REPRINTED  FROM  THE  PUBLICATIONS  OF 

THE  ACADEMY  OF  POLITICAL  SCIENCE 

IN  THE  CITY  OF  NEW  YORK 

The  Proceedings  of  the  Academy 

Vol.  8,  No.  4,  January,  1920;  Vol.  10,  No.  I,  July,  1922 

The  Political  Science  Quarterly 

Vol.  36,  No.  3,  September,  1921 


THE   ACADEMY    OF    POLITICAL   SCIENCE 
KENT    HALL,  COLUMBIA    UNIVERSITY,  NEW  YORK 

1922 


3*5 


TABLE  OF  CONTENTS 


Part  One 

RAILROAD  LEGISLATION 

1.    RAILROAD  REGULATION:  GENERAL  PRINCIPLES 

PAGE 

Solving  the  Railroad  Problem    1 

T.  W.  Van  Metre 

The  Senate  Committee  Railroad  Bill 6 

Albert  B.  Cummins 

The  House  Committee  Railroad  Bill 28 

Schuyler  Merritt 

The  Legislative  Program  of  the  Interstate  Commerce 

Commission    36 

Balthasar  H.  Meyer 

The  Relations  of  Shipper  and  Carrier   46 

Frank  H.  Dixon 

Objects  of  Railway  Legislation 54 

Frank  W.  Noxon 

The  Scope  and  Functions  of  a  Federal  Transportation 
Board    60 

Emory  R.  Johnson  ''* 

The  House  and  Senate  Railroad  Bills 66 

Richard  Waterman 

Why  Railroad  Regulation  has  Failed 70 

Harry  T.  Newcomb 

An  Engineer's  Point  of  View 74 

H.  Buel 

The  Regulation  of  Water  Carriers 79 

R.  A.  Hiscano 

iii 


"  '  >6 


jy  TABLE  OF  CONTENTS 

PAGE 

2.    RAILWAY  EARNINGS  AND  CREDIT 

The  Railroads  and  the  Investor 82 

Thomas  Reed  Powell 

The  Revenue  Needs  of  the  Railroads 87 

Howard  Elliott 

Railroad  Legislation  97 

Alfred  P.  Thorn 

Relation  of  Valuation  to  Investments 107 

Thomas  W .  Hulme 

Reconstruction  of  Railroad  Credit 112 

John  E.  Oldham 

Pending  Congressional  Legislation  as  Affecting  Owners 

of  Railroad  Securities 120 

S.  Dairies  War  field 

The  Price  of  Private  Ownership 130 

Pierpont  V.  Davis 

Essentials  of  a  Sound  Policy  as  to  the  Investor 135 

William  L.  Ransom 

What  Warren  S.  Stone  Thought  in  1911 146 

Slason  Thompson 

Railway  Credit  and  the  Interstate  Commerce  Commis- 
sion       150 

Charles  Whiting  Baker 

3.    THE  RAILROAD  LABOR  PROBLEM 

The  Human  Factor  in  the  Railroad  Business 152 

Henry  R.  Seager 

Pending  Railway  Legislation    156 

Timothy  Shea 

Relations  of  Railroads  and  Their  Employees 165 

W.  G.  Besler 

The  Adjustment  of  Labor  Controversies    178 

W.  N.  Doak 

Labor  and  the  Democratic  Control  of  Railroads 184 

Frederic  C.  Howe 

Some  Practical  Aspects  of  the  Railroad  Problem 191 

Ivy  L.  Lee 

Discriminations   195 

William  Church  Osborn 


TABLE  OF  CONTENTS  V 

PAGB 

4.    THE  RAILROADS  AND  THE  PUBLIC 

The  Importance  of  the  Public  Interest   198 

Edwin  R.  A.  Seligman 

The  Railroads  and  the  Public    201 

Francis  H.  Sisson 

The  Objections  to  an  Immediate  Resumption  of  Private 
Operation    213 

George  Foster  Peabody 

Relation  of  Public  Ownership  to  Democracy  and  Social 

Justice    , 218 

Albert  M.  Todd 

Government  Ownership  the  Only  Solution 248 

W.  P.  Boland 

Nationalizing  the  Railroads    252 

Calvin  Tom  kins 

APPENDIX  TO  PART  ONE 

Report  of  the  Annual  Meeting  Committee 263 

Samuel  McCune  Lindsay 


Part  Two 
RAILROADS  AND  BUSINESS  PROSPERITY 

1.    INTRODUCTION 

Railroad  Regulation  under  the  Transportation  Act.  . . .  269 
T.  W.  Van  Metre 

2.  LABOR  PROVISIONS  OF  THE  TRANSPORTATION  ACT 

Railroad  Labor  and  the  Labor  Problem 279 

Henry  R.  Seager 

Functions  and  Policies  of  the  Railroad  Labor  Board 283 

Frank  H.  Dixon 

Labor  Policies  of  the  Transportation  Act  : 

(a)  From  the  Point  of  View  of  Railway  Management. . . .    293 

C.  B.  Heiserman 

(b)  From  the  Point  of  View  of  Railroad  Employees  ....   303 

W.  N.  Doak 

(c)  From  the  Standpoint  of  the  Public  Group 313 

Henry  T.  Hunt 


vi  TABLE  OF  CONTENTS 

PAGE 

3.    RAILWAY  POLICIES  AND  THE  GENERAL  WELFARE 

The  Farmers  and  the  Railroads  324 

Henry  C.  Wallace 

Transportation  Act  of  1920    338 

Daniel  Willard 

The  New  Basis  of  Rate-Making 348 

Walker  D.  Hines 

4.    FREIGHT  RATES  AND  BUSINESS  REVIVAL 

How  Railroads  Adapt  Themselves   to  National   Condi- 
tions      355 

Albert  Shaw 

The  Transportation  Cost  in  a  Basic   Industry  —  Steel 

Products     359 

Charles  R.  Hook 

How  the  Railroads  May  Render  Maximum  Service 363 

William  J.  Cunningham 

What  Railroads  are   Doing  to   Increase   Economy   and 
Efficiency  of  Operation 371 

R.  H.  Aishton 

The  Transportation  Factor  in  the  Price  of  Coal 37+ 

/.  D.  A.  Morrow 

APPENDIX  TO  PART  TWO 

The  Semi-Annual  Meeting,  1922,  of  the  Academy  of  Po- 
litical Science 387 

Samuel  McCune  Lindsay 


Part  Three 

1.  The  Problem  of  Railroad  Control 389- 

Emory  R.  Johnson 

["  Bound  at  end  of  Volume."] 

2.  Practical  Tests  of  the  Transportation  Act 

A.  M.  Sakolski 


FOREWORD 

The  publication  of  this  volume  containing  all  the  papers  on  the 
railroad  problem  published  by  the  Academy  during  the  past  three 
years,  and  its  special  distribution  as  a  source  of  public  reference, 
has  been  made  possible  through  the  generosity  and  public  spirit  of  a 
small  group  of  citizens,  most  of  them  railway  executives  or  persons 
interested  in  railroad  management  or  investments.  It  is  hardly  neces- 
sary to  say  that  many  of  the  papers  do  not  present  the  views  of  any 
of  these  gentlemen  nor  of  any  group  of  railway  executives  or  in- 
vestors. It  is  their  belief,  however,  as  it  is  that  of  the  officers  and 
directors  of  the  Academy  who  planned  the  program  of  the  meetings 
at  which  many  of  these  papers  were  originally  presented,  that  it  is 
wise  statesmanship  to  present  to  the  public  all  the  facts  and  all 
points  of  view  that  are  worthy  of  a  hearing  and  the  most  varied  sug- 
gestions for  solutions  of  great  public  questions,  in  order  that  public 
opinion,  which  is  the  court  of  last  resort  and  which  forms  slowly 
before  reaching  final  conclusions,  may  be  both  enlightened  and 
broadly  informed.  The  railroad  question,  which  is  of  such  vital 
importance  to  the  economic  life  of  the  country  and  affects  its  basic 
industries,  will  not  be  settled  piece-meal  as  particular  difficulties, 
whether  strikes  or  threatened  strikes  or  controversies  over  rates  and 
public  regulation,  may  be  solved.  A  comprehensive  national  policy 
must  be  developed  and  consistently  followed  until  America  has  a 
sound  system  of  transportation  under  whatever  plan  of  ownership, 
operation  and  control  that  will  give  the  American  people  adequate 
service  to  meet  the  needs  of  their  growing  industries  and  the  nation 
adequate  protection  for  purposes  of  defence. 

All  of  the  papers  contained  in  this  volume  have  been  copyrighted 
by  the  Academy  of  Political  Science  in  the  publications  in  which 
they  originally  appeared,  but  the  Academy  will  gladly  grant  permis- 
sion to  reproduce  part  of  them  or  all  of  them  in  any  legitimate  way 
that  will  increase  their  educational  usefulness. 

The  papers  contained  in  Part  One  of  this  volume  are  taken  from 
the  Proceedings  of  the  Academy,  volume  8,  number  4,  January  1920, 
which  were  edited  by  Professor  Thurman  William  Van  Metre  of 
Columbia  University;  they  cover  the  series  of  addresses  and  papers 
presented  at  the  annual  meeting  of  the  Academy,  November  21-22, 
1919,  at  which  the  subject  of  "  Railroad  Legislation  "  was  discussed 
in  four  sessions. 

vii 


Vlll 


FOREWORD 


Part  Two  of  this  volume  is  taken  from  the  Proceedings  of  the 
Academy,  volume  10,  number  1,  July  1922,  the  volume  entitled 
"  Railroads  and  Business  Prosperity  ",  and  edited  by  Professor  Van 
Metre  and  Professor  Parker  Thomas  Moon.  It  is  a  series  of  ad- 
dresses and  papers  presented  at  the  semi-annual  meeting  of  the 
Academy,  April  28,  1922. 

Part  Three  contains  two  papers  taken  from  the  Political  Science 
Quarterly  for  September,  1921,  edited  by  Professor  Moon. 


SOLVING  THE  RAILROAD  PROBLEM 

T.  W.  VAN  METRE 
Assistant   Professor   of    Transportation,    Columbia   University 

A  DISTINGUISHED  railroad  president  said  in  a  recent 
address,  "The  railroad  problem  has  not  changed,  nor  is 
it  shrouded  in  mystery.  It  is  this:  railroad  earnings 
and  credit  must  be  created  sufficient  to  support  the  existing  rail- 
road investment  and  attract  the  additional  capital  the  transporta- 
tion business  requires  in  the  public  interest."  At  first  thought  one 
is  inclined  to  say,  "If  the  railroad  problem  is  so  simple  why  are 
we  having  all  this  hubbub  and  confusion  about  solving  it?" 
Second  thoughts,  however,  with  their  usual  disagreeable  habit  of 
transforming  simplicity  into  complexity,  inform  us  that  the  rail- 
road problem,  as  expressed  by  the  distinguished  railroad  presi- 
dent, is  the  problem  of  every  other  business,  and  of  every  indi- 
vidual in  the  world.  It  is  the  old  problem  of  making  both  ends 
meet.  There  is  no  mystery  involved  in  the  mere  statement  of 
this  universal  problem.  But  when  we  attempt  to  solve  it  sim- 
plicity vanishes  and  mystery  enters;  our  simultaneous  equations 
have  altogether  too  many  unknown  quantities. 

It  is  generally  recognized  that  in  creating  the  earnings  suffi- 
cient to  support  the  existing  railroad  investment  and  attract  new 
capital  three  results  will  be  achieved :  ( 1 )  The  public  will  re- 
ceive reasonably  adequate  and  efficient  service  from  existing 
transportation  facilities;  (2)  labor  will  have  reasonably  adequate 
wages  and  satisfactory  working  conditions;  (3)  investors  will 
obtain  a  reasonable  return  on  their  invested  capital.  Before  we 
can  devise  a  program  to  bring  about  these  results  it  is  necessary 
to  make  certain  inquiries.  What  is  the  reasonably  adequate  and 
efficient  service  which  the  public  has  a  right  to  expect  from  exist- 
ing transportation  facilities?  What  are  reasonable  wages  and 
working  conditions  for  railroad  labor?  What  is  reasonable  re- 
muneration for  railroad  investors?  The  railroad  problem  begins 
to  leave  the  realm  of  simplicity.  Let  us  go  farther.  Who  shall 
answer  these  questions?  Upon  what  facts  shall  the  answers  be 
based  ?  And  after  these  questions  are  answered,  what  machinery 
shall  we  devise  to  translate  the  answers  into  effective  action  ? 

In  view  of  the  complexity  of  the  railroad  problem  it  is  amaz- 

[513] 


2  RAILROAD  LEGISLATION  [Vol.  VIII 

ing  how  many  infallible  solutions  have  been  presented.  It  is 
but  fair  to  note  that  the  author  of  each  "plan"  declaims  with 
patriotic  fervor,  that  his  plan  is  best  because  it  is  the  only  one 
in  which  the  public  interest  is  the  paramount  consideration. 
There  has  never  been  a  time  in  which  the  public  interest  has  been 
so  completely  indentified  with  so  many  strongly  opposed  private 
interests. 

Notwithstanding  the  extensive  discussion  of  the  railroad  prob- 
lem during  recent  months,  little  progress  has  been  made  toward 
a  satisfactory  solution.  There  have  been  no  frank  and  specific 
replies  to  the  questions  which  must  be  answered  before  a  satis- 
factory program  of  regulation  can  be  adopted.  What  answer 
do  we  have  from  investors,  for  instance,  to  the  questions  con- 
cerning the  return  on  capital?  It  has  been  suggested  by  certain 
groups  that  rates  should  be  made  to  yield  a  return  of  six  per  cent 
on  property  investment.  What  is  the  property  investment  in 
railroads?  Railroad  property  accounts  for  the  years  preceding 
1908  are  quite  worthless.  Physical  valuation  will  not  show  the 
value  of  investment.  Capitalization  does  not  show  it.  Some 
people  are,  by  implication,  urging  the  "validation"  of  present 
railroad  capitalization,  asserting  that  the  water  injected  into  rail- 
road securities  in  times  past  has  long  since  been  absorbed  through 
the  process  of  putting  "earnings  back  into  the  property."  Even 
if  this  were  admitted  to  be  true,  the  question  at  once  arises  as  to 
how  we  should  consider  these  reinvested  earnings  in  the  regula- 
tion of  rates. 

Should  we  finally  agree  upon  the  investment  value  of  the  rail- 
roads, and  decide  that  rates  should  be  made  to  yield  a  return  of 
six  per  cent  on  this  value,  we  should  have  the  problem  of  equaliz- 
ing the  earnings  of  "weak"  and  "strong"  roads.  The  suggestion 
that  the  strong  roads  give  up  all  their  earnings  in  excess  of  six 
per  cent,  arouses  bitter  opposition  among  the  officials  and  stock- 
holders of  the  strong  roads.  They  unanimously  urge  that  capi- 
tal receive  an  "incentive"  in  the  way  of  adequate  return.  What 
is  an  adequate  return  ?  At  least  six  per  cent.  Very  well,  here  is  a 
virtual  guarantee  of  six  per  cent,  with  the  understanding  that  all 
excess  earnings  be  returned  to  the  public  treasury.  But  the  con- 
fiscation of  earnings  above  six  percent,  would  destroy  "incentive." 
This  incentive  is  a  tender  flower.  It  is  hard  to  escape  the  con- 
clusion that  the  chief  stockholders  and  managers  of  the  strong 
roads  desire  rates  to  be  made  high  enough  to  insure  adequate 

[514] 


No.  4]  SOLVING    THE   RAILROAD   PROBLEM  3 

returns  for  the  weakest  roads.  It  is  pleasant  for  them  to  contem- 
plate what  such  rates  would  mean.  "The  strong  roads,"  they 
say,  "should  be  allowed  to  earn  well  above  any  minimum  so  that 
in  lean  years  the  public  will  not  be  asked  to  pay  increased  rates." 
Present  and  past  experiences  with  railroad  companies  and  street 
car  companies  hardly  justify  confidence  in  statements  of  this  na- 
ture. Owners  of  street  railway  monopolies,  when  making  ex- 
orbitant profits  out  of  a  five-cent  fare  justify  their  returns  because 
of  the  great  "risk"  assumed.  When  the  risk  overtakes  them  their 
refuge  is  not  the  surplus  of  fat  years,  but  a  "flexible"  fare. 

All  classes  of  labor  are  now  alert  and  suspicious.  The  wages 
of  railroad  employees  have  been  raised  again  and  again  during 
the  past  four  years,  but  the  leaders  still  declare  wages  "inade- 
quate." Veiled  threats  of  strikes  and  hints  regarding  "conspira- 
cies" on  the  part  of  railroad  managers  to  reduce  wages  when  pri- 
vate operation  is  restored  serve  to  warn  us  of  a  constantly  im- 
pending danger.  Efforts  are  being  made  to  pass  anti-strike 
laws,  and  the  laborer  wants  to  know  if  the  Government  has  any 
more  right  to  commandeer  underpaid  labor  than  it  has  to  require 
the  unproductive  investment  of  capital.  Labor  leaders  denounce 
an  anti-strike  law  which  does  not  contain  a  "bill  of  rights,"  a 
labor  code,  which  will  insure  to  labor  a  reasonable  wage.  But 
the  nearest  approach  which  a  labor  leader  makes  to  defining  a 
reasonable  wage  is  his  never  failing  assertion  of  the  inadequacy 
of  the  present  wages  being  paid.  Labor  frowns  upon  all  talk  of 
making  future  reductions  in  wages  commensurate  with  possible 
future  reductions  in  the  cost  of  living.  What  labor  has  gained, 
that  will  labor  hold.  Perhaps  the  leaders  have  a  vague  idea  of 
getting  something  more  than  a  minimum  in  order  that  they  will 
not  find  it  necessary  in  "lean  years"  to  ask  for  increased  pay. 

There  is  little  doubt  that  a  satisfactory  solution  of  our  present 
railroad  problem  must  be  based  upon  some  definite  conception 
of  what  is  a  reasonable  return  to  capital  and  to  labor.  Though 
it  will  probably  never  be  possible  to  satisfy  these  two  interests, 
some  way  must  be  found  to  appease  them.  In  return  the  public 
must  demand  efficient  and  honest  service  from  both  capital  and 
labor.  We  apparently  never  get  tired,  though  we  have  abundant 
opportunity,  of  being  told  that  the  transportation  system  of  the 
United  States  is  the  most  efficient  and  economical  transportation 
system  in  the  world.  In  fact  it  is  constantly  repeated  that  all 
business  activities,  except  the  post-office,  are  carried  on  more  ef- 

[515] 


4  RAILROAD  LEGISLATION  [Vol.  VIII 

ficiently  in  the  United  States  than  in  any  other  country.  We 
need  to  be  awakened.  How  can  anybody  having  a  part  in  the 
operation  and  management  of  the  rail-and- water  terminal  facili- 
ties of  New  York  City  boast  about  the  efficiency  of  our  trans- 
portation system?  Moreover,  the  waste,  inefficiency  and  in- 
competence displayed  in  New  York  have  their  counterparts  in 
virtually  all  the  other  great  terminals  of  the  United  States.  If 
machinery  is  not  created  to  bring  about  by  compulsion  the  elimi- 
nation of  waste  and  inefficiency  in  our  railroad  terminals  the  pub- 
lic will  be  cheated  of  its  due.  Had  the  railroad  managers  used 
existing  equipment  with  all  possible  efficiency  in  1917  the  Gov- 
ernment would  have  remained  out  of  the  railroad  business. 

Another  feature  of  the  reasonably  adequate  and  efficient  serv- 
ice which  the  public  has  a  right  to  demand  is  the  development  of 
cheap  water  transportation,  especially  along  the  sea-coasts,  and 
the  coordination  of  rail  and  water  carriers.  We  talk  to-day 
about  increasing  production.  One  of  the  greatest  economic  sins 
committed  in  this  country  has  been  the  deliberate  efforts  of  rail- 
road interests  to  decrease  the  production  of  transportation  by 
employing  unfair  methods  to  destroy  water  competition.  Such 
sabotage  deserves  the  strongest  condemnation  and  it  should  not 
be  allowed  to  continue. 

It  is  not  impossible  that  our  attempts  to  solve  the  railroad 
problem  will  eventually  result  in  government  ownership  of  rail- 
roads. Though  most  students  of  transportation  do  not  look  with 
favor  upon  government  ownership  of  railroads  in  the  United 
States  there  are  none  who  will  deny  its  possibility  and  few  who 
deny  its  probability.  The  promise  of  satisfactory  legislation  in 
the  near  future  is  not  bright.  If  the  roads  are  turned  back  to 
their  owners  without  provision  for  the  adequate  protection  of  la- 
bor, capital,  and  the  public,  government  ownership  is  inevitable. 

Government  ownership  will  probably  not  come  by  the  adoption 
of  the  Plumb  Plan.  Nor  will  government  ownership  mean  that 
the  nation  has  turned  to  Socialism.  If  government  ownership 
comes  it  will  be  an  expedient,  a  measure  of  last  resort,  the  only 
feasible  way  out  of  a  troublesome  situation.  While  government 
ownership  is  to  be  deprecated  it  is  not  to  be  feared.  A  great 
many  men  are  exhibiting  genuine  concern  about  the  rule  of  ninety- 
eight  million  people  by  two  million.  In  so  doing  they  cast  most 
unpleasant  reflections  upon  the  intelligence  of  the  ninety-eight 
million,  of  which  they  are  themselves  a  part. 

[516] 


No.  4]  SOLVING    THE   RAILROAD   PROBLEM  5 

Whether  we  are  to  have  government  ownership  in  the  near 
future  depends  entirely  upon  the  ability  of  Congress  to  frame  a 
law  which  will  make  private  ownership  and  operation  possible. 
It  is  impossible  for  Congress  to  enact  a  law  which  will  satisfy 
all  private  interests.  It  would  be  unwise  for  Congress  to  enact 
a  law  which  would  completely  satisfy  any  single  private  interest. 
And  if  the  diverse  interests  involved  in  the  settlement  of  the 
railroad  problem  do  not  soon  adopt  a  spirit  of  concession  and 
conciliation,  and  evince  a  willingness  to  have  their  cases  tried 
on  their  merits,  without  the  introduction  of  so  much  prejudiced 
testimony,  any  law  which  Congress  may  pass  will  create  such  dis- 
content that  private  ownership  will  be  immediately  endangered. 


LS17] 


THE  SENATE  COMMITTEE  RAILROAD  BILL 

ALBERT  B.  CUMMINS* 
U.  S.  Senator  from  Iowa,  Chairman  Senate  Committee  on  Interstate 

Commerce 

I  THINK  no  one  realizes  more  completely  or  fully  than  I  do 
the  magnitude  and  the  difficulties  of  the  task  of  railroad 
regulation.  There  are  in  this  country  something  like 
260,000  miles  of  main-track  railway.  These  systems  of  railways 
serve  100,000,000  people  and  furnish  them  with  their  chief  means 
of  transportation  and  communication.  It  is  obvious  that  any 
system  of  transportation  in  a  commercial,  civilized  country  is  the 
basic  fundamental  industry  of  that  country,  for  without  adequate 
facilities  for  communication  and  transportation  and  without  a 
service  rendered  for  reasonable  compensation  the  growth  and 
development  of  the  country  is  impossible. 

The  problem  that  we  have  before  us  is  vastly  more  complicated 
and  intricate  than  is  presented  in  the  transportation  problem  of 
any  other  country  in  the  world.  This  is  due  to  the  extent  of  our 
country,  the  variety  of  its  production,  and  the  dissimilarity  of 
conditions  under  which  business  is  carried  on,  as  well  as  the 
dissimilarity  of  conditions  under  which  transportation  is  fur- 
nished. 

I  believe  that  transportation  is  a  governmental  function.  A 
single  reflection  upon  the  conditions  throughout  the  world  as  well 
as  in  our  own  country  will  demonstrate  that  the  furnishing  of 
transportation  to  a  commercial  people  is  a  governmental  function. 
Aside  from  those  in  the  United  States,  substantially  all  of  the 
railways  of  the  world  are  owned  and  operated  by  the  govern- 
ments of  the  various  countries.  I  might  qualify  that  by  saying 
that  Great  Britain  has  not  yet  become  the  owner  of  her  railways, 
but  her  policy  at  this  time  is  one  that  is  the  equivalent  of  govern- 
ment ownership  and  operation. 

While  I  believe  transportation  to  be  a  governmental  function, 
I  am  nevertheless  of  the  opinion  that  the  policy  of  private  owner- 
ship and  operation  of  railroads  should  be  continued  in  the  United 
States.  The  only  reason  that  I  am  in  favor  of  private  ownership 
and  private  operation  is  because  I  believe  that  better  and  cheaper 
transportation  can  be  furnished  to  the  people  of  this  country 

*  This  article  is  an  abridgment  of  the  speech  delivered  by  Senator  Cum- 
mins in  the  Senate,  as  printed  in  the  Congressional  Record  of  December 
4,  1919.  It  was  prepared  by  the  Editor  with  the  consent  of  Senator 
Cummins. 

[518] 


No.  4]  THE  SENATE  COMMITTEE  RAILROAD  BILL  7 

through  the  instrumentality  of  private  ownership  and  private 
operation  than  can  be  furnished  to  the  people  of  the  country 
through  direct  Government  operation ;  but  there  is  nothing  in- 
consistent with  the  best  forms  of  government  in  Government 
ownership  and  operation  of  our  systems  of  transportation.  The 
Government  has  the  right  to  select  the  agencies  or  instrumen- 
talities which  will  most  certainly  render  to  the  people  the  service 
they  require,  and,  if  the  Government  believes,  as  I  believe,  that 
the  services  can  be  rendered  and  will  be  rendered  more  ade- 
quately and  more  cheaply  through  private  corporations  under 
strict  public  supervision  it  has  the  right,  of  course,  and  it  is  its 
duty,  of  course,  to  select  such  agencies  for  the  purpose  of  render- 
ing the  service  which  all  the  people  require. 

Private  operation  of  railways  cannot  be  continued  as  a  perma- 
nent policy  unless  there  is  a  radical  change  in  our  system  of  regu- 
lation. There  is  but  one  course  which  will  insure  successful 
private  operation.  Our  Interstate  Commerce  Commission  has 
been  a  faithful,  intelligent  body  of  men.  They  have  made  mis- 
takes now  and  then,  which  I  have  not  hesitated  to  criticize ;  but, 
on  the  whole,  I  think  they  have  attempted  to  do  their  duty  as  they 
have  seen  their  duty.  It  has  been,  however,  utterly  impossible 
for  the  Interstate  Commerce  Commission  to  establish  a  body  of 
rates  in  the  United  States  that  would  enable  the  railway  systems 
of  the  Nation  to  maintain  themselves.  It  has  been  utterly  impossi- 
ble for  any  body  of  men  to  make  a  system  of  rates  that  will  sustain 
the  weaker  railroads  of  the  country  without  giving  the  stronger 
railroads  an  income  excessive  and  intolerable  in  its  extent;  and 
there  lies  the  great,  fundamental  obstacle  in  our  system  of  rate 
making.  The  Interstate  Commerce  Commission  can  no  more  give 
to  each  railway  of  the  United  States  the  return  to  which  it  is  fairly 
entitled  than  it  can  annihilate  distance  or  overcome  any  other  law 
of  nature ;  and  for  that  reason,  when  the  Government  took 
possession  of  the  railroads,  some  of  the  railroads  were  earning 
enormous  and  excessive  incomes,  while  other  railroads  were 
struggling  against  adversity,  and  were  utterly  incapable  of  ren- 
dering to  their  communities  the  service  to  which  those  communi- 
ties were  fairly  entitled ;  and  it  was  obvious,  I  think,  to  the  stu- 
dents of  the  subject,  long  before  the  Government  took  possession, 
that  we  must  adopt  some  plan  that  would  remove  this  inherent, 
fundamental  difficulty. 

According  to  the  decisions  of  the  Supreme  Court  of  the  United 

[519] 


8  RAILROAD  LEGISLATION  [Vol.  VIII 

States,  and  according  to  the  views  of  every  other  tribunal  in  all 
the  world  of  which  I  have  ever  heard,  they  have  this  general  idea 
with  regard  to  the  regulation  of  public  utilities:  That  is  to  say, 
if  a  public  utility  is  fairly  constructed,  if  it  is  properly  and  effi- 
ciently managed,  it  has  a  right  under  the  Constitution  to  earn 
a  fair  return  upon  the  investment,  upon  the  value  of  the  property 
which  renders  the  services — not  upon  the  value  of  the  property 
as  determined  by  a  capitalization  of  its  earnings  under  a  given 
body  of  rates — but  it  has  a  constitutional  right  to  earn,  as  against 
regulation,  a  fair  return  upon  the  value  of  the  property — that  is, 
its  investment — if  it  has  been  honestly  constructed  and  is  ef- 
ficiently operated.  The  Supreme  Court  of  the  United  States  has 
declared  that  doctrine  over  and  over  again.  It  is  idle  for  us  to 
attempt,  even  if  we  were  to  desire  to  attempt,  to  escape  the 
principle  which  the  courts  have  laid  down.  It  is  a  just  principle ; 
it  is  fair  and  honest ;  and  I,  for  one,  do  not  desire  to  escape  it. 

In  the  case  of  a  railroad  that  is  earning,  we  will  say,  1  per  cent 
upon  that  fair  investment  under  honest  management,  why  is 
it  not  earning  more  than  1  per  cent  ?  It  is  not  earning  more  than 
1  per  cent  for  two  reasons :  First,  our  regulating  tribunals  have 
determined  the  rates  upon  which  it  shall  do  business.  We  have 
interfered  with  its  liberty  in  the  transaction  of  its  business  to  that 
extent;  but  if  we  have  not  interfered  directly  we  have  attached 
those  rates  to  some  competitor  which  can  do  business  upon,  we 
will  assume,  the  body  of  rates  which  I  have  premised,  and  that 
renders  the  unfortunately  situated  property  incapable  of  earning 
more.  Now,  I  believe  that  any  such  system  is  not  only  unfair 
but  it  is  unconstitutional  as  well. 

We  are  agreed  that  we  can  not  raise  the  rates  upon  the  weaker 
properties  so  that  they  will  be  self-sustaining,  because  that  would 
give  to  the  stronger  properties,  which  move  70  per  cent  of  the 
business  of  the  United  States,  an  income  so  excessive  that  it 
would  not  be  tolerated  for  a  single  month.  Therefore  that  solu- 
tion must  be  discarded.  We  can  not  give  to  the  stronger  proper- 
ties the  rates  which  would  return  for  them  no  more  than  a  fair 
interest  upon  the  value  of  their  property  and  that  alone,  because 
that  means  death  to  the  weaker  properties  which  must  compete 
with  them  in  traffic,  and,  of  course,  upon  the  same  terms,  so  far 
as  rates  are  concerned.  So  we  must  inquire  further.  We  must 
find  some  other  way  in  which  we  can  maintain  the  general  trans- 


[520] 


No.  4]  THE  SENATE  COMMITTEE  RAILROAD  BILL  9 

portation  system  of  the  United  States  and  promote  the  welfare 
of  our  people.    We  must  find  some  other  way  in  which  to  do  it 
How  can  we  accomplish  it  ? 

You  may  inquire  as  you  will,  you  may  study  it  as  deeply  as 
you  may,  but  you  will  finally  reach  the  conclusion  that  it  can  only 
be  done  through  consolidation.  There  are  various  kinds  of  con- 
solidation. The  problem  can  be  solved  by  Government  ownership 
because  that  is  complete  consolidation.  If  the  Government  owned 
and  operated  all  the  railroads  of  the  United  States  it  would. 
I  take  it,  establish  charges  for  transportation  which  would 
pay  the  cost  of  maintenance  and  operation  and  the  interest  upon 
whatever  indebtedness  might  be  created  in  acquiring  the  proper- 
ties. It  would  then  be  compelled  either  to  raise  the  rates  and 
charges  or  to  appropriate  from  the  Treasury,  if  our  past  history 
is  to  be  accepted  as  a  lamp  for  our  guidance  in  the  future,  some- 
thing like  a  billion  dollars  a  year  in  order  to  construct  such  addi- 
tions, betterments,  and  enlargements  as  the  progress  and  growth 
of  the  country  would  demand. 

That  is  one  way  in  which  this  problem  can  be  reached,  and  it 
is  a  perfectly  logical  way  in  which  to  reach  it,  because  it  then 
reduces  the  transportation  of  the  United  States  to  a  common 
level,  and  the  United  States  becomes  responsible  for  furnishing 
facilities  in  every  quarter  of  the  country. 

There  are  two  kinds  of  consolidation  which  may  be  pursued 
in  private  ownership  with  continued  private  operation.  The 
first  is  complete  consolidation  of  all  the  railway  properties  of 
the  United  States  in  one  corporation.  That  is  a  plan  which 
has  some  advantages.  There  are  unquestionably  some  advan- 
tages in  complete  unification,  complete  control  over  all  the  rail- 
roads of  the  United  States  as  a  single  transportation  facility. 

The  plan  adopted  by  the  Senate  Committee,  however,  is  consoli- 
dation into  comparatively  few  systems.  The  bill  provides  that 
they  shall  be  consolidated  in  not  less  than  20  nor  more  than  35 
systems.  I  think  it  ought  to  be  not  less  than  16  nor  more  than 
30  or  35  systems,  but  that  probably  does  not  affect  the  merit  of 
the  proposal  itself. 

I  am  in  favor  of  comparatively  few  systems  because  it  will 
permit  the  play  of  competition  in  service,  and,  although  you  will 
regard  me  as  exceedingly  heterodox  and  possibly  as  unobservant 
of   the   history   of   the   past,   I   say   competition   in   rates   also. 

[521] 


10  RAILROAD  LEGISLATION  [Vol.  VIII 

This  suggestion  which  has  gone  abroad  over  the  country  and 
which  everybody  has  received  and  apparently  accepted  that 
there  is  no  competition  in  rates  under  the  regulation  which  we 
have  provided  is  not  well  founded. 

I  am  in  favor  of  several  systems  so  related  to  each  other  that 
they  can  carry  traffic  for  substantially  the  same  cost  as  com- 
pared with  the  value  of  their  property,  because  it  does  permit, 
it  invites,  it  commands  that  honorable  rivalry  in  business  which 
in  my  judgment  "is  the  mainspring  of  success  in  every  enter- 
prise. I  am  looking  toward  advances  of  socialism  with  extreme 
regret  mainly  because  I  believe  that  that  theory  of  Government 
destroys  the  initiative,  the  energy,  the  progress  of  mankind.  I 
want  to  preserve  in  the  railway  service  all  of  those  moving  forces 
which  can  possibly  be  retained. 

I  do  not  attach  so  great  importance  to  the  competition  or 
rivalry  so  far  as  rates  are  concerned  as  I  do  to  the  rivalry  in 
service.  The  latter  begins  with  a  desire  to  please  the  people 
who  either  ride  upon  trains  or  whose  property  is  transported  from 
one  place  to  another.  It  means  attention,  it  means  courtesy,  it 
means  a  concern  for  the  public  mind  that  could  not  be  secured 
in  any  other  way  than  through  the  opportunity  of  the  public 
to  pass  from  one  service  to  another.  It  means  infinitely  more 
when  we  come  to  consider  the  ease  with  which  one  patron  is 
served  and  the  ease  with  which  the  desires  of  another  may  be 
denied ;  the  furnishing  of  cars  promptly,  the  movement  of  cars 
speedily,  the  effort  made  in  every  quarter,  through  every  em- 
ployee, to  do  the  work  at  hand  in  the  most  efficient  manner  in 
which  it  is  capable  of  being  done. 

This  is  the  reason  the  committee  has  decided  that  it  would  be 
better  to  consolidate  the  railroads  of  the  United  States  into  not 
less  than  20  nor  more  than  35  systems,  in  order  to  accomplish, 
first,  the  possibility  of  imposing  a  given  body  of  rates  upon  the 
carriers  with  the  outcome  that  each  of  the  systems  would  earn 
substantially  the  same  net  return  as  compared  with  the  value  of 
the  property  employed  in  the  service ;  and,  second,  in  order  to 
give  this  great  business,  this  overpowering  business,  the  same 
motive  for  efficiency  and  excellence  that  we  observe,  and  hope 
we  always  will  observe,  in  every  other  great  venture. 

There  can  be  little  question  of  the  practicability  of  a  division 
of  the  railway  properties  into  not  less  than  20  nor  more  than  35 
systems  that  will  accomplish  the  purposes  I  have  described.    The 

[522] 


No.  4]  THE  SENATE  COMMITTEE  RAILROAD  BILL  11 

committee  has  not  acted  without  the  utmost  consideration  on  that 
question  and  without  all  the  information  that  it  could  secure. 
The  committee — and  I  speak  more  confidently  of  my  own  con- 
victions— knows  that  it  is  practicable  to  divide  the  railways  of 
the  United  States  into  not  less  than  20  nor  more  than  35  systems, 
so  that  tested  by  the  business  of  the  three  years  before  the  war — 
and  that  is  the  period  to  which  we  must  all  resort  in  order  to  ob- 
tain information  upon  that  subject — the  net  earnings  of  each 
system  compared  with  the  value  of  the  property  rendering  the 
service,  I  care  not  how  the  value  of  the  property  is  ascertained — 
will  be  so  nearly  equal  that  the  difference  will  be  negligible.  I 
venture  the  prophecy  that  if  the  provisions  of  this  bill  shall  ever 
go  into  effect  the  governmental  body  which  is  appointed  to  make 
the  division  and  to  carry  out  the  provisions  of  the  bill  will  be 
able  to  divide  the  country  into  20  systems,  and  there  will  not  be 
the  difference  of  one-quarter  of  1  per  cent  in  the  earnings,  the  net 
income,  of  the  several  systems  as  compared  with  the  value  of  the 
properties  as  fixed  by  the  Interstate  Commerce  Commission. 

Then,  if  we  pursue  the  policy  of  private  ownership,  we  will 
have  a  body  of  railroads  upon  which  the  Interstate  Commerce 
Commission  can  act,  doing  justice  both  to  the  people  and  to  those 
who  have  invested  their  money  in  the  properties.  Then  the  In- 
terstate Commerce  Commission  can  make  rates  that  will  pay  to 
the  carriers,  as  nearly  as  human  foresight  can  provide,  just 
enough  to  make  a  fair  return  upon  the  value  of  the  property. 

I  have  pointed  out  at  some  length  the  views  of  the  committee — 
and  they  are  my  own  views  as  well — upon  this  fundamental  pro- 
posal, because  it  is  the  heart  of  the  bill.  If  it  is  not  thought  de- 
sirable to  make  this  advance  toward  the  regulation  of  these  pub- 
lic utilities,  my  judgment  would  be  that  it  is  not  advisable  to  pass 
the  bill  at  all,  for  if  the  roads  are  to  be  returned  under  the  regula- 
tions which  formerly  existed,  believing,  as  I  do,  that  private  op- 
eration under  such  conditions  is  impossible  and  that  it  will  end  in 
utter  collapse,  I  will  necessarily  find  myself  advocating  the  as- 
sumption upon  the  part  of  the  Government  of  the  duty  of  owning 
and  operating  our  transportation  facilities. 

How  is  this  consolidation  to  be  accomplished?  The  bill  pro- 
poses to  create  a  Transportation  Board,  which  is  to  undertake  to 
divide  all  the  railways  of  the  United  States,  with  some  immate- 
rial exceptions,  into  not  less  than  20  nor  more  than  35  systems. 

[523] 


12  RAILROAD  LEGISLATION  [Vol.  VIH 

The  discretion  between  20  and  35  is  vested  in  the  Board  by 
section  9  of  the  bill,  which  reads  as  follows: 

Sec.  9.  It  is  hereby  declared  to  be  the  policy  of  the  United  States  in 
the  exercise  of  its  authority  to  regulate  commerce  among  the  States  and 
with  foreign  nations  and  its  other  constitutional  powers,  that  the  rail- 
ways of  the  continental  United  States  shall,  as  soon  as  may  be  practicable, 
and  in  the  manner  hereinafter  provided,  be  divided  in  ownership  and  for 
operation  into  not  less  than  20  nor  more  than  35  separate  and  distinct 
systems,  each  of  said  systems  to  be  owned  and  operated  by  a  distinct 
corporation  organized  or  reorganized  under  this  act. 

In  the  aforesaid  division  of  the  said  railways  into  such  systems  competi- 
tion shall  be  preserved  as  fully  as  possible,  and  wherever  practicable  the 
existing  routes  and  channels  of  trade  and  commerce  shall  be  maintained. 
The  several  systems  shall  be  so  arranged  that  the  cost  of  transportation 
as  between  competitive  systems  and  as  related  to  the  value  of  the  prop- 
erties through  which  the  service  is  rendered  shall  be  the  same  so  far  as 
practicable,  so  that  these  systems  can  employ  uniform  rates  in  the  move- 
ment of  competitive  traffic  and  under  efficient  management  earn  sub- 
stantially the  same  rate  of  return  upon  the  value  of  the  railway  properties 
involved  in  the  comparison. 

This  might  be  called  the  charter  of  the  new  system.  It  is  fur- 
ther developed  in  section  10  by  providing  that  the  Transportation 
Board  shall  make  this  division  and  then  give  public  notice  to 
all  who  are  interested  of  a  hearing  upon  it,  and  at  that  hearing 
all  who  may  be  interested  either  from  the  capital  standpoint  or  the 
labor  standpoint  or  the  shipping  standpoint  will  be  heard,  and 
after  that  hearing  is  concluded  then  the  Board  adopts  a  plan, 
whatever  plan  may  seem  to  it  wise,  and  if  that  plan  of  division 
is  approved  by  the  Interstate  Commerce  Commission  it  becomes 
final,  save  as  it  may  be  modified  upon  subsequent  application 
by  anyone  who  may  present  a  good  cause  for  reconsideration  in 
that  respect. 

For  a  period  of  seven  years  the  consolidations  are  voluntary. 
If  any  railway  company  desires  to  organize  a  Federal  corporation 
under  the  provisions  of  this  bill,  a  new  corporation  can  be  or- 
ganized. If,  on  the  other  hand,  a  corporation  already  organized 
desires  to  reorganize  so  as  to  become  a  Federal  corporation,  it 
may  do  so  under  the  terms  of  this  bill ;  but  the  consolidation  that 
takes  place  during  the  seven  years  must  be  either  through  the 
medium  of  a  corporation  organized  under  the  terms  of  the  bill 
or  through  a  corporation  reorganized  under  the  terms  of  the  bill. 
We  have  made  practically  the  same  provision  for  reincorporating 
State  corporations  that  was  made  long  ago  for  the  reincorporation 
of  national  banks,  turning  a  national  bank  from  a  State  insti- 
tution into  a  Federal  institution.  One  or  the  other  of  these  two 
things  must  precede  any  consolidation  which  takes  place  under 
the  bill. 

[524] 


No.  4]  THE  SENATE  COMMITTEE  RAILROAD  BILL  13 

I  may  say  a  word  with  regard  to  the  seven  years.  The  only 
reason  for  postponing  compulsory  consolidation  for  a  single 
moment,  in  my  judgment,  is  that  the  work  of  the  Interstate  Com- 
merce Commission  in  valuing  the  railroad  properties  may  be 
completed.  It  is  said  that  this  work  will  have  been  finished  in 
the  course  of  two  or  three  years. 

It  may,  however,  be  five  years  before  it  is  finally  and  fully 
done;  and  inasmuch  as  these  incorporations,  whether  reorganiz- 
ing or  originally  incorporating,  must  be  based  upon  the  actual 
value  of  the  railroad  properties,  it  was  quite  essential  that  some 
time  be  given  to  the  Interstate  Commerce  Commission  to  com- 
plete its  work.  In  the  case  of  a  voluntary  consolidation,  it  would 
be  the  duty  of  the  Interstate  Commerce  Commission  at  once  to 
go  forward  to  the  ascertainment  of  the  value  of  the  property 
immediately  concerned  in  the  voluntary  consolidation,  and  to 
complete  that  particular  part  of  the  work  at  the  earliest  possible 
moment.  And  this  leads  me,  now,  to  suggest  an  additional  reason 
for  the  value  which  I  attach  to  the  consolidation. 

All  of  us  know  that  there  has  been  a  great  deal  of  controversy, 
very  much  suspicion,  infinite  distrust  among  the  people  with  re- 
spect to  the  value  of  railroad  property  as  compared  with  the  capi- 
talization. Constitutionally  we  are  unable  to  determine  the  value 
of  railroad  property,  or  even  to  indicate  or  declare  the  elements 
which  a  judicial  tribunal  shall  consider  in  determining  that  value. 
Nevertheless,  it  is  of  the  highest  importance  that  in  some  way  or 
other  the  feeling  on  the  part  of  the  people  that  they  are  called 
upon  to  contribute  a  revenue  which  is  to  be  distributed  upon  un- 
founded capital  shall  be  removed.  It  can  only  be  removed  in  one 
of  two  ways.  It  must  either  be  removed  by  ascertaining  that  the 
present  capitalization  is  not  greater  than  it  should  be — a  con- 
tingency which  does  not  meet  my  view  of  it — or  it  may  be  re- 
moved by  reducing  the  capitalization  to  the  real  value  of  the 
property  upon  which  the  people  are  called  upon  to  pay  a  return. 
This  bill  provides  that  the  Interstate  Commerce  Commission 
shall  ascertain  the  value  of  this  property  as  the  consolidations  take 
place,  and  that  the  capitalization  of  these  new  corporations  which 
are  brought  into  existence  in  the  manner  I  have  described  shall 
not  exceed  the  value  of  the  railroad  property ;  and  once  this  prin- 
ciple is  adopted  and  once  these  consolidations  shall  have  taken 
place,  the  terror  which  we  all  have  in  mind,  known  as  the  un- 
earned increment,  can  no  longer  disturb  the  American  people. 

[525] 


14  RAILROAD  LEGISLATION  [Vol.  VIII 

I  want  as  much  as  anyone  can  want  that  the  people  shall  be 
called  upon  to  pay  only  upon  an  actual  value ;  and  while  I  know 
that  we  can  not  determine  for  the  past  years  what  value  is  and 
what  elements  it  shall  contain,  for  the  future  we  can;  and  if  these 
consolidations  are  carried  into  effect  the  future  is  safe,  so  far  as 
unearned  increment  is  concerned  and  so  far  as  values  are  con- 
cerned.   We  will  have  that  matter  settled  for  all  time. 

Section  6  of  the  bill  provides  that  the  territory  and  the  rail- 
roads of  the  United  States  shall  be  divided  by  the  Interstate  Com- 
merce Commission  into  rate-making  districts,  as  many  as  the 
Commission  thinks  desirable.  Having  established  the  districts 
and  having  ascertained  the  value  of  the  property  in  a  given  dis- 
trict, the  Commission  is  directed  to  make  rates  or  to  approve 
rates  that  will  as  nearly  as  may  be  return  an  aggregate  net  op- 
erating income  for  all  the  railroads  of  that  district  equal  to  Sy2 
per  cent  on  the  value  of  the  property  in  that  district.  The  com- 
mittee believes  that  Sy2  per  cent  fairly  represents  the  policy  of 
Congress  with  respect  to  a  return  upon  railway  property.  Orig- 
inally, as  I  introduced  the  bill  from  the  subcommittee,  instead  of  a 
Sy2  per  cent  rate,  the  provision  was  for  a  fair  return  upon  the 
value  of  the  property,  but  it  was  believed  by  the  majority  of  the 
committee  that  it  would  be  better  for  Congress  to  declare  the 
policy  rather  than  to  transfer  it  or  commit  it  to  any  regulating 
body.  So  for  the  first  time  in  the  history  of  railway  regulation 
it  is  suggested  that  Congress  shall  declare  what  it  regards  as  a 
fair  return  upon  the  value  of  property  rendering  a  public  service, 
and  that  fair  return,  according  to  the  provisions  of  the  bill,  is 
Sy2  per  cent  upon  the  value  of  the  property  involved. 

This  Sy2  per  cent  does  not  relate  to  capitalization;  it  does  not 
relate  to  capital  stock ;  it  does  not  relate  to  outside  investments 
vast  in  their  extent  which  some  of  the  companies  own  and  hold 
for  profit.  It  relates  only  to  the  property  which  renders  service 
to  the  public. 

The  bill  also  gives  to  the  Interstate  Commerce  Commission 
authority  to  increase  that  basis  by  one-half  of  1  per  cent,  if  it 
so  desires  to  do,  solely  for  the  purpose  of  creating  a  fund  for 
expenditures  for  what  are  known  as  nonproductive  improve- 
ments and  which  are  not  under  any  circumstances  to  be  capital- 
ized, but  which,  in  substance,  will  be  held  by  the  railway  compan- 
ies in  trust  for  the  public. 

Now,  let  us  see  what  Sy2  per  cent  will  do.     Five  and  a  half 

[526] 


No.  4]  THE  SENATE  COMMITTEE  RAILROAD  BILL  15 

per  cent  upon  the  value  of  the  property  in  a  given  rate-making 
district  does  not  mean  that  each  railroad  shall  have  Sl/2  per  cent 
upon  the  value  of  its  property.  It  means  that  one  railroad  will 
earn  8  per  cent  upon  the  value  of  its  property,  another  railroad 
will  earn  3  per  cent  or  5  per  cent,  some  of  them  2  per  cent,  some 
of  them  possibly,  as  high  as  10  per  cent.  That  arises  from  the 
disparity  in  the  earning  capacity  of  the  roads.  When  you  put 
a  given  body  of  rates  upon  the  territory  lying  between  Chicago 
and  New  York,  we  will  say,  rates  which  must  be  used  in  common 
by  the  New  York  Central,  the  Pennsylvania,  the  Baltimore  & 
Ohio,  the  Erie,  the  Chesapeake  &  Ohio,  and  so  on,  one  of  those 
roads  will  earn  very  much  more  than  $y2  per  cent  while  another 
will  earn  very  much  less  than  Sy2  per  cent.  That  is  the  insoluble 
problem  under  present  conditions.  We  can  not  escape  it  in  a 
moment ;  nothing  can  remove  it  except  the  consolidation  of  which 
I  have  spoken.  However,  until  that  consolidation  takes  places 
we  must  deal  with  it  as  best  we  can.  That  brings  me  to  another 
feature  of  the  section  to  which  I  have  been  alluding  and  which  I 
intend  to  discuss  just  as  briefly  as  possible. 

The  bill  proposes  that  any  railway  company  which  receives 
an  operating  income  during  any  year  of  more  than  6  per  cent 
upon  the  value  of  its  property  shall  divide  equally  the  excess 
between  6  and  7  per  cent  between  a  company  reserve  fund  and 
a  general  railroad  contingent  fund.  The  first  portion  belongs  to 
the  company  itself,  the  latter  belongs  to  the  Government  of  the 
United  States.  The  first  is  to  be  used  by  the  company  whenever 
its  operating  income  falls  below  6  per  cent.  It  is  to  be  accumu- 
lated from  year  to  year  until  it  reaches  5  per  cent  upon  the  value 
of  the  property.  After  that  time  the  company  retains  one-third 
of  the  excess  above  6  per  cent  and  pays  to  the  Transportation 
Board  or  to  the  Government  two-thirds  of  the  excess.  The  ex- 
cess above  7  per  cent  goes  one- fourth  to  the  company  reserve 
fund  and  three-fourths  to  the  Government.  The  Government  con- 
tingent fund  has  no  limit  and  is  to  be  used  by  the  Transportation 
Board  to  advance  the  general  transportation  interests  of  the 
United  States.  However,  it  is  not  given  so  free  a  hand  as  my 
remarks  might  indicate,  for  it  is  provided  in  the  bill  that  the  pro- 
motion of  the  general  transportation  interests  must  be  effected 
either  by  the  purchase  of  equipment  and  of  transportation  facili- 
ties to  be  rented  or  leased  to  the  weaker  railroad  companies,  or 
it  must  be  used  by  loaning  to  the  weaker  companies  sums  of 

[527] 


16  RAILROAD  LEGISLATION  [Vol.  VIII 

money  to  be  expended  in  the  purchase  of  facilities  to  render  the 
service  which  the  people  require.  That  is  the  best  that  the  com- 
mittee could  do  in  this  transition  period  to  equalize  the  spread  in 
the  earnings  of  the  companies. 

We  were  constantly  impressed  with  the  idea  that  we  must 
accompish  in  some  way  the  maintenance  of  the  weaker  com- 
panies. We  know  that,  judged  by  the  ordinary  standards  of 
credit,  when  they  go  into  the  markets  of  the  country  they  will 
be  unable  to  borrow  the  money  necessary  to  keep  their  properties 
in  that  condition  necessary  for  economical  and  efficient  use.  So  we 
propose  to  take  from  the  larger  railroad  companies  a  portion  of 
their  excess  earnings  above  6  per  cent  and  devote  them  to  in- 
creasing the  facilities  in  the  hands  of  the  companies  which  are 
unable  to  purchase  or  construct  them  for  themselves. 

I  regard  it  not  only  as  one  of  the  most  vital  but  most  equitable 
features  of  the  bill,  as  much  and  bitterly  as  it  has  been  attacked. 

I  will  say  one  word  with  regard  to  the  attacks  upon  that  fea- 
ture of  the  bill.  Singularly  enough,  it  is  assailed  from  two  quar- 
ters. The  railway  executives,  representing  the  railroads,  attack 
it  bitterly  on  the  ground  that  it  is  not  only  unjust  but  unconstitu- 
tional, and  some  very  enthusiastic  citizens  of  the  country  who 
have  no  interest  in  railways  attack  it  on  the  ground  that  it  is  an 
approach  toward  socialism  or  communism  and  ought  not,  there- 
fore, to  be  fostered,  encouraged,  or  adopted. 

A  moment's  consideration  may  not  remove  doubt  with  regard 
to  its  constitutionality,  for  I  can  not  hope  to  remove  a  doubt  in 
a  moment  that  has  been  instilled  by  so  distinguished  an  authority 
as  an  ex- Justice  of  the  Supreme  Court  of  the  United  States; 
but  I  at  least  can  point  out  the  path  along  which  the  committee 
traveled  in  reaching  the  conclusion  that  the  provision  was  and  is 
constitutional. 

Ex- Justice  Hughes  has  rendered  an  opinion  in  which  he  says 
that  that  part  of  the  bill  is  unconstitutional  because  it  takes  prop- 
erty from  its  owner  without  just  compensation.  Ex-Senator 
Elihu  Root,  occupying  an  equally  commanding  position  at  the 
bar  of  the  country,  is  just  as  confident  that  it  is  constitutional. 
The  lawyers  have  ranged  themselves,  a  great  many  of  them, 
upon  one  side  or  the  other  of  this  question;  but  I  am  bound  to 
say  that  so  far  as  they  have  been  organized  up  to  this  time,  a  de- 
cided preponderance  in  number,  at  least,  will  be  found  upon  the 
side  of  the  committee,  which  holds  that  the  provision  is  constitu- 

[S28] 


No.  4]  THE  SENATE  COMMITTEE  RAILROAD  BILL  17 

tional.  To  me  there  is  no  question  about  it.  I  do  not  want  to 
disparage  the  learning  of  any  man,  certainly  not  his  intelligence, 
but  to  me  the  proposition  that  this  provision  is  unconstitutional 
means  the  destruction  of  all  regulation.  If  it  is  true  that  we  can 
not  limit  the  earnings  of  a  public  utility,  a  common  carrier,  we 
might  as  well  abandon  our  efforts  to  protect  the  people  in  any  sys- 
tem of  regulation. 

I  have  no  question  at  all  with  regard  to  either  the  justice  of 
the  provision  or  its  constitutionality.  We  have  pursued  this 
narrow,  cramped,  and  restrictive  policy  long  enough.  If  Con- 
gress is  not  able  to  lift  itself  above  the  murky  prejudices  of 
former  years,  and  examine  transportation  from  a  national  stand- 
point, and  establish  those  regulations  which  are  necessary  for 
the  welfare  of  all  the  people,  we  must  either  go  at  once  to  Gov- 
ernment ownership  and  operation,  or  leave  the  railway  com- 
panies untrammeled  and  unrestricted  to  impose  on  the  people  of 
the  country  for  their  service  just  such  charges  as  they  may  think 
best. 

Section  24  of  the  bill  relates  to  the  issuance  of  railway  securi- 
ties. For  years  there  has  been  a  constant  and  general  demand 
that  in  some  way  or  other  the  Federal  Government  shall  under- 
take the  supervision  of  the  issuance  of  railway  securities.  A 
bill  to  that  end  passed  the  House  at  one  time  and  was  reported 
favorably  by  the  Committee  on  Interstate  Commerce  of  the  Sen- 
ate. However,  it  did  not  receive  consideration  in  the  Senate, 
and  therefore  never  became  a  law.  But  I  think  there  is  no  real 
opposition  to  a  provision  which  confers  upon  the  Interstate 
Commerce  Commission,  or  some  other  Federal  agency,  the  super- 
vision of  the  issuance  of  railway  securities,  in  that  way  relieving 
the  railway  companies  of  the  regulation  of  40  of  the  48  States 
of  the  Union. 

Section  34  is  an  enlargement  of  the  car-service  act,  which  it  is 
unnecessary  for  me  to  comment  upon  at  any  great  length.  The 
car-service  act  passed  in  1917  was  intended  to  give  to  the  Govern- 
ment a  larger  function  with  respect  to  the  movement  of  commod- 
ities, the  movement  of  trains,  the  supply  of  cars,  and  all  matters 
pretaining  to  the  general  disposition  of  our  commerce.  In  this 
section  too,  we  have  attempted  to  give  the  Government  the  right 
to  prevent  construction  of  new  lines.  The  very  difficulties  we 
have  heard  urged  so  often  have  arisen  at  times  because  railroads 
have  been  constructed  where  and  when  they  ought  not  to  have 

[529] 


18  RAILROAD  LEGISLATION  [Vol.  VIII 

been  constructed.  So  we  have  given  to  the  Interstate  Commerce 
Commission,  in  connection  with  the  Board,  the  jurisdiction  to 
prevent  the  construction  of  new  lines  where  obviously  the  con- 
struction would  simply  impose  another  burden  upon  the  public 
without  adding  anything  to  the  public  welfare. 

We  have  also  given  to  the  Government  wider  and  broader 
power  with  respect  to  furnishing  adequate  and  safe  facilities, 
so  that  the  Commission  or  the  Board  can  command  railroad  com- 
panies to  equip  their  lines  with  proper  facilities  and  to  procure 
the  necessary  cars  and  engines  to  transact  their  business  with 
promptitude,  all  the  while,  of  course,  conditioned  upon  the  power 
of  the  companies  to  comply  with  the  demands  or  the  commands 
of  the  Government.  It  would  be  idle  to  require  a  company  that 
could  not  secure  the  money  with  which  to  do  it  to  buy  additional 
cars  or  additional  engines,  or  anything  of  that  kind. 

We  have  rewritten  in  section  37  what  is  known  as  the  long- 
and-short-haul  clause.  That  will  give  rise  undoubtedly  to  some 
discussion.  We  have  not  adopted  the  positive,  rigid,  long-haul 
provision.  We  still  permit,  under  section  37  of  the  bill,  some 
discretion  on  the  part  of  the  Interstate  Commerce  Commission. 
We  have  said  to  the  Interstate  Commerce  Commission  that  it 
could  grant  the  privilege  to  any  company  to  charge  more  for 
a  shorter  than  for  a  longer  distance  in  the  same  direction,  but 
that  in  doing  so  the  rate  for  the  longer  distance  must  be  found 
by  the  Commission  to  be  a  compensatory  rate. 

A  compensatory  rate,  I  assume,  means  a  rate  which  will  en- 
able the  railway  company  charging  it  to  defray  the  cost  of 
maintenance  and  operation  and  that  will  also  bear  its  just  share 
of  the  return  upon  capital. 

Another  modification  that  we  have  made  in  section  4  of  the  in- 
terstate commerce  act  is  that  where  there  are  two  competitive 
land  lines,  one  longer  than  the  other,  that  under  no  circumstances 
must  the  longer  line  charge  more  to  an  intermediate  point  not  far- 
ther from  the  origin  than  the  haul  on  the  short  line  than  it  charges 
for  the  competitive  point.  It  must  not  charge  more  for  the 
same  distance  than  the  rate  charged  on  the  short  line.  That,  I 
think,  will  correct  a  good  many  injustices  that  have  occurred  in 
the  application  of  the  law  as  it  exists. 

We  are  all  familiar  with  what  is  known  as  the  anti-pooling 
section  of  the  Interstate  Commerce  Act.    That  section  now  reads : 

Sec.  5.  (as  amended  Aug.  24,  1912).  That  it  shall  be  unlawful  for  any 

[530] 


No.  4]  THE  SENATE  COMMITTEE  RAILROAD  BILL  19 

common  carrier  subject  to  the  provisions  of  this  act  to  enter  into  any 
contract,  agreement,  or  combination  with  any  other  common  carrier  or 
carriers  for  the  pooling  of  freights  of  different  and  competing  railroads, 
or  to  divide  between  them  the  aggregate  or  net  proceeds  of  the  earnings 
of  such  railroads,  or  any  portion  thereof ;  and  in  any  case  of  an  agree- 
ment for  the  pooling  of  freights  as  aforesaid,  each  day  of  its  con- 
tinuance shall  be  deemed  a  separate  offense. 

That  is  the  law  at  the  present  time.  The  change  that  is  pro- 
posed in  this  section  of  the  act  to  regulate  commerce  is  to  insert 
after  the  word  "  that  "  the  words  : 

Except  upon  specific  approval  by  order  of  the  commission  as  in  this 
section  provided. 

Then  there  is  added  the  following: 

Provided,  That  whenever  the  commission  shall  be  of  the  opinion,  after 
hearing,  upon  application  of  any  carrier  or  carriers,  by  railway  or  water, 
subject  to  this  act,  that  the  division  of  traffic  or  earnings  between  any 
such  carrier  or  carriers  will  be  in  the  interest  of  better  service  to  the 
public,  economy  in  operation,  or  otherwise  of  advantage  to  the  con- 
venience of  commerce  and  the  people,  and  will  tend  to  equalize  earnings 
between  the  said  carriers  and  will  not  unduly  restrain  competition,  the 
commission  shall  have  authority,  by  order,  to  approve  and  authorize  such 
division  of  traffic  or  earnings  between  carriers  under  such  rules  and  regu- 
lations, and  for  such  consideration  as  between  said  carriers  and  upon 
such  terms  and  conditions,  and  for  such  length  of  time,  as  shall  be  found 
by  the  commission  to  be  just  and  reasonable  in  terms. 

The  commission  may  from  time  to  time,  for  good  cause  shown,  make 
such  supplemental  orders  in  the  premises  as  it  may  deem  necessary  or 
appropriate,  and  may  by  any  such  supplemental  order  modify  or  set  aside 
the  provisions  of  any  previous  order  as  to  the  extent  of  the  division,  or 
as  to  the  rules,  regulations,  terms,  conditions,  or  consideration  currently 
moving  in  respect  of  any  such  divisions  so  theretofore  approved  and  au- 
thorized. The  same  procedure  as  to  filing  of  applications  and  serving  of 
notice  of  hearing  upon  proper  State  authorities  with  opportunity  to  be 
heard  shall  be  had  as  is  provided  in  section  24  of  this  act  relating  to 
"securities." 

It  is  apparent  that  this  provision  is  not  only  an  important  one 
but  is  a  radical  departure  from  the  policy  which  we  have  hereto- 
fore pursued.  It  is  intended  in  this  way  to  give  to  the  Interstate 
Commerce  Commission  the  authority,  practically,  to  unify  the 
railroads  of  the  country  prior  to  the  consolidation  which  is  pro- 
vided for  in  the  bill.  All  of  us  have  observed  that  the  one  great 
advantage  of  Government  ownership  is  the  unification  which  may 
take  place  and  the  ability  on  the  part  of  common  carriers  to 
choose  that  route  for  the  traffic  which  is  most  economical  and 
which  will  best  serve  the  public  interest.  It  was  thought  by  the 
committee  that,  at  least  in  the  transition  period — and  this  has  no 
limitation  in  point  of  time — but  especially  for  the  transition 
period,  the  commission  should  have  the  power  to  control  the  rail- 
way companies  in  the  respect  I  have  just  mentioned. 

For  years  there  has  been  a  conflict  between  the  jurisdiction 

[531] 


20  RAILROAD  LEGISLATION      '  [Vol.  VIII 

of  the  Federal  Government  and  the  jurisdiction  of  the  State 
governments  with  regard  to  the  adjustment  of  rates.  All  know 
that  the  Constitution  of  the  United  States  confers  upon  Congress 
the  authority  to  regulate  commerce  among  the  States  and  with 
foreign  nations.  Obviously,  this  authority  is  limited  to  the  regu- 
lation or  control  of  interstate  commerce  and  matters  that  are  in- 
separably connected  with  or  incident  to  interstate  commerce. 
The  Supreme  Court  of  the  United  States  has  had  occasion  in  at 
least  three  separate  cases  to  discuss  the  subject. 

Many  are  familiar  with  what  is  known  as  the  Shreveport  de- 
cision. In  that  series  of  cases  it  was  alleged  that  the  State  of 
Texas  had  established  rates  for  intrastate  traffic — that  is,  for  the 
movement  of  traffic  from  one  point  in  the  State  to  another  point 
in  the  State — which  discriminated  against  the  rates  which  the 
Interstate  Commerce  Commission  had  established  for  the  move- 
ment of  traffic  from  points  beyond  the  State  into  the  State,  and 
the  particular  community  which  complained  and  which  gave  the 
name  to  the  case  I  have  mentioned  was  Shreveport.  It  complained 
that  it  could  not  do  business  with  the  State  of  Texas  in  competi- 
tion with  rivals  located  in  the  State,  for  the  reason  that  the  busi- 
ness men  within  the  State  were  shipping  freight  at  a  much  lower 
rate,  comparatively,  than  the  Interstate  Commerce  Commission 
had  found  to  be  reasonable  from  Shreveport  into  the  State. 

I  need  not  follow  that  case  in  all  its  phases;  but  it  finally 
reached  the  Supreme  Court  of  the  United  States  and  the  Supreme 
Court  held  that  the  authority  of  the  Federal  Government  as  it 
could  be  vested  in  the  Interstate  Commerce  Commission  extended 
to  the  removal  of  a  discrimination  between  the  interstate  rates 
and  the  intrastate  rates,  but  no  authority  had  been  given  by  Con- 
gress to  the  Commission  to  declare  what  the  intrastate  rate  should 
be  in  comparison  with  the  interstate  rate. 

The  committee  has  attempted  simply  to  express  the  decisions 
of  the  Supreme  Court  of  the  United  States.  We  have  not  at- 
tempted to  carry  the  authority  of  Congress  beyond  the  exact 
point  ruled  by  the  Supreme  Court  in  the  cases  to  which  I  have 
referred ;  and  the  only  thing  we  have  done  in  the  matter  has 
been  to  confer  upon  the  Interstate  Commerce  Commission  the 
authority  to  remove  the  discrimination,  when  established  in  a 
proper  proceeding  before  that  body — an  authority  which  it  does 
not  now  have.  As  it  is  now,  al  lthat  can  be  done  is  for  the  Com- 
mission to  go  forward  from  time  to  time  and  condemn  and  enjoin 

[532] 


No.  4]  THE  SENATE  COMMITTEE  RAILROAD  BILL  21 

the  State  rates  until  they  finally  reach  the  level  which,  in  the 
judgment  of  the  commission,  is  no  discrimination. 

Section  44  of  the  bill  deals  with  the  problem  of  the  length  of 
time  that  the  commission  may  suspend  rates  which  are  filed  by  the 
carrier.  As  the  law  now  is,  each  carrier  has  a  right,  and  is  re- 
quired, if  it  desires  to  change  the  rates,  to  file  its  schedule  of  rates 
with  the  Interstate  Commerce  Commission.  The  Commission  can 
then,  upon  summary  investigation  or  inquiry,  suspend  those 
rates  pending  an  investigation.  Under  the  law,  as  it  is,  it  has 
the  authority  to  suspend  them  for  120  days,  and  then  it  was  given 
the  authority  if  it  did  not  finish  the  inquiry  within  that  time,  to 
extend  the  time  for  another  period  of  six  months.  The  latter 
period  has  been  shortened  in  this  bill  to  a  period  of  30  days. 

The  reason  for  that  is  this:  In  the  first  place,  the  Interstate 
Commerce  Commission  has  been  overworked.  There  is  no  body 
of  men  in  the  employ  of  the  Government,  or  exercising  govern- 
mental functions,  upon  which  so  great  a  weight  of  labor  has 
fallen  as  the  Interstate  Commerce  Commission,  and  it  is  utterly 
impossible  for  it  to  fulfill  its  full  duties  as  the  law  now  is.  But 
we  have  undertaken  in  this  bill  to  create  a  new  governmental 
function  known  as  the  Transportation  Board,  and  we  have  given 
to  that  board  many  of  the  important  duties  which  are  now  per- 
formed by  the  Interstate  Commerce  Commission,  and  endeav- 
ored in  that  way  to  relieve  the  latter  body  of  some  of  its  labor; 
and  we  hope  that  we  have  accomplished  that  purpose  to  such 
an  extent  as  that  the  Commission  will  be  able  promptly  to  de- 
cide all  the  matters  which  are  brought  before  it. 

Broadly  speaking,  we  have  left  with  the  Interstate  Commerce 
Commission  what  might  be  described  as  semi  or  quasi  judicial 
powers,  rate  making  in  all  its  phases,  the  valuation  of  railroad 
property  in  all  its  aspects,  accounting  absolutely  necessary  as  an 
incident  to  rate  making  and  to  valuation.  These  are  in  the  main 
the  great  branches  of  labor  which  are  left  with  the  Interstate 
Commerce  Commission.  The  purely  administrative  duties,  those 
duties  which  have  to  do  with  the  physical  operation  of  the  rail- 
way properties,  are  transferred  to  the  Transportation  Board. 

I  desire  to  mention  briefly  section  45.  It  is  entirely  new,  and 
it  is  an  effort  to  coordinate  land  and  ocean  traffic.  We  have  not 
given  to  the  Interstate  Commerce  Commission  any  authority  to 
regulate  or  control  or  to  fix  rates  for  what  is  known  as  port-to- 
port  traffic,  whether  inland  or  exterior,  and  we  do  not  propose  to 

[533] 


22  RAILROAD  LEGISLATION  [Vol.  VIII 

do  so.  Everybody  understands  that  we  can  not  put  upon  ocean 
traffic  or  coastwise  or  coast-to-coast  traffic  or  even  upon  river 
traffic  the  same  regulations  that  are  very  advisable  with  regard 
to  land  traffic. 

We  are  now  hoping  to  enlarge  our  foreign  business.  We  are 
endeavoring  to  make  it  as  easy  as  possible  for  the  business  men 
of  America  to  ship  their  goods  anywhere  throughout  the  world. 
The  Shipping  Board  is  trying,  I  think  faithfully,  to  establish  a 
series  of  ocean  routes  with  boats  having  regular  sailings  and 
regular  routes  as  well. 

The  great  corporations  of  the  country,  the  great  producers, 
such  as  the  United  States  Steel  Corporation  or  other  corpora- 
tions of  that  character,  are  able  to  maintain  their  agents  every- 
where, which  serve  as  a  medium  of  information  to  such  shippers, 
and  they  know  when  the  boats  sail  and  where  they  go  and  what 
the  rates  are,  and  are  in  every  way  able  to  reach  a  foreign 
country  or  foreign  countries  in  the  most  convenient  way.  That 
is  not  true  of  the  small  shippers  of  the  land.  They  do  not  know 
when  these  boats  sail  and  where  they  go.  They  do  not  know 
what  the  ordinary  rates  are  upon  these  ocean-going  ships. 

Section  45  provides  that  every  ocean-going  steamship  company 
and  every  coastwise  or  coast-to-coast  company  with  a  regular 
route  and  with  regular  sailings  shall  file  with  the  Transportation 
Board  a  schedule  containing  the  dates  of  the  sailings  of  its  ships 
and  the  routes  over  which  its  ships  travel,  together  with  the  ordi- 
nary rates  which  are  charged  for  transportation.  These  sched- 
ules are  required  to  be  filed  with  the  transportation  board,  and 
they  are  then  given  to  the  land  carriers,  the  railroads,  and  the 
railway  companies  are  required  to  maintain  that  compilation  of 
information  in  every  office  designated  by  the  Transportation 
Board.  It  is  the  thought  of  the  committee  that  the  Board  would 
designate  the  important  or  the^ chief  centers  of  production  and  of 
shipment. 

Then  any  man  who  has  a  shipment  destined  for  some  foreign 
port,  for  Liverpool,  Hongkong,  Melbourne,  or  for  San  Francisco 
or  New  Orleans,  even  though  he  may  not  be  able  to  maintain 
a  commission  man  at  the  port  or  any  other  of  the  conveniences 
which  the  great  shippers  enjoy,  may  take  to  any  railroad  office 
in  the  country  his  shipment  and  deliver  it  to  the  land  carrier,  and 
the  land  carrier  must  issue  to  him  a  through  bill  of  lading.  It 
then  becomes  the  duty  of  the  land  carrier  to  deliver  the  shipment 

[534] 


No.  4]  THE  SENATE  COMMITTEE  RAILROAD  BILL  23 

to  the  boat  in  whose  care  it  is  consigned,  and  the  land  carrier 
must  absorb  in  the  charge  for  the  land  carriage  the  cost  of  trans- 
fer from  the  railway  train  to  the  boat.  In  that  way  we  will  have 
established  all  over  the  United  States  a  system  which  I  think  will 
tend  to  increase  largely  our  export  trade  and  coast-to-coast  trade. 

The  part  of  the  bill  which  I  have  reserved  for  final  considera- 
tion is  that  which  proposes  that  the  Government  shall  adjudicate 
the  disputes  which  may  arise  between  employees  of  railway  com- 
panies and  the  corporations,  and  which  forbids  a  conspiracy  or 
combination  for  the  purpose  of  preventing  the  movement  of  com- 
modities in  interstate  commerce. 

I  venture  to  say  that  no  provision  in  any  bill  submitted  to  Con- 
gress in  recent  years  has  been  more  generally  discussed  through- 
out the  country  than  the  one  to  which  I  have  just  referred.  There 
are  some  very  extravagant  praises  for  it ;  there  are  some  very 
unjust  denunciations  of  it.  I  look  upon  it  as  a  vital  part  not  only 
of  this  bill  but  vital  part  of  our  policy  in  the  future  so  far  as  the 
basic  industries  of  America  are  concerned.  The  committee  has 
endeavored  to  find  a  solution  of  one  of  the  most  complicated 
and  difficult  problems  ever  presented  to  a  legislative  body.  I  am 
not  prepared  to  affirm  that  the  committee  has  discovered  the  only 
solution,  and  I  am  sure  its  members  will  be  very  glad  to  receive 
any  suggestions  that  may  make  the  arrangement  which  we  have 
provided  for  more  just  or  more  efficient;  but  I  speak  for  sub- 
stantially every  member  of  the  committee,  a  very  large  majority 
of  the  committee,  when  I  say  that  it  is  our  profound  conviction 
that  the  civilization  of  America — I  was  about  to  say  the  civiliza- 
tion of  the  world — can  not  continue,  can  not  endure  unless  or- 
ganized society  can  find  some  plan  to  preserve  industrial  peace 
and  order.  To  me  the  thought  that  to  accomplish  justice  for  those 
who  may  be  interested  in  any  dispute  it  is  necessary  to  either 
freeze  or  starve  the  American  people  is  unthinkable  and  intoler- 
able. 

I  have  always,  I  believe,  entertained  for  men  who  worked  not 
sympathy — for  men  who  work  need  no  sympathy — but  I  believe 
that  I  have  always  held  for  them  the  keenest  interest  in  the 
struggles  in  which  they  have  been  engaged  and  the  most  sanguine 
hope  of  their  ultimate  success  in  obtaining  the  justice  to  which  I 
believe  they  are  entitled.    But  that  does  not  settle  this  controversy. 

The  committee  recognized  that  transportation  is  the  basic  in- 
dustry of  the  Nation.     It  may  not  be  more  important  from  one 

[535] 


24  RAILROAD  LEGISLATION  [Vol.  VIII 

aspect  than  many  others,  but  none  of  the  others  can  be  conducted 
or  carried  on  without  transportation.  Leave  New  York  without 
transportation  for  two  weeks  and  thousands  of  people  will  either 
starve  or  freeze,  according  to  the  season ;  indeed,  they  may  do 
both.  What  I  say  of  New  York  is  true  of  Philadelphia,  of  Chi- 
cago, and  of  every  great  center  of  population. 

We  cannot  contemplate  that  situation  with  any  complacency 
at  all.  If  we.  can  not  find  some  way  in  which  to  avoid  a  contin- 
gency of  that  kind,  then  our  boasted  and  vaunted  institutions  are 
mere  shadows,  and  we  should  escape  from  them  as  speedily  as 
possible.  There  must  be  some  way  in  which  a  democracy  can  ad- 
minister justice  to  all  its  citizens,  which  will  render  them  so  far 
content  that  they  will  be  willing  to  carry  on  their  vocations  with 
reasonable   regularity  and  continuity. 

I  was  the  author  of  a  somewhat  famous  statement  or  declara- 
tion in  what  is  known  as  the  Clayton  anti-trust  law  that  the  labor 
of  a  human  being  is  neither  a  commodity  nor  an  article  of  com- 
merce. I  believed  in  the  truth  of  that  statement  profoundly  then, 
and  I  believe  in  it  now  with  even  deeper  conviction.  The  labor 
of  a  human  being  is  not  a  commodity ;  it  ought  not  to  be  dealt  with 
as  a  commodity ;  it  ought  not  to  be  judged  as  a  commodity ;  for 
it  is  a  part  of  human  energy  that  may  solicit  and  ought  to  receive 
the  same  high  consideration  from  the  world,  from  every  legisla- 
tive body,  as  all  other  energies  of  the  mind  or  the  body.  But  I 
am  just  as  much  opposed  to  Mr.  Foster  dealing  with  human 
labor  as  a  commodity  as  I  am  opposed  to  Mr.  Gary  dealing  with 
it  as  a  commodity. 

It  is  just  as  fatal  to  the  welfare  of  the  United  States  to  allow 
the  American  Federation  of  Labor  to  deal  with  labor  as  a  com- 
modity or  as  an  article  of  commerce  as  it  is  to  allow  the  National 
Association  of  Manufacturers  to  deal  with  it  as  an  article  of 
commerce  or  as  a  commodity.  This  declaration,  for  which  I 
make  no  apology  and  of  which  I  am  as  proud  as  I  am  of  any 
other  act  of  my  life,  means  that  labor  is  to  be  lifted  above  the 
rules  which  apply  to  mere  inanimate  things;  it  means  that  the 
laborer  is  a  man  and  entitled  to  all  the  rights  of  a  man,  and 
that  he  should  no  more  sell  himself  to  a  labor  union  than  he 
should  sell  himself  to  a  manufacturer.  It  applies  to  both  and 
all  with  equal  force  and  strength. 

I  do  not  want  to  be  understood  that  I  am  opposed  to  labor 
unions.     On  the  contrary,  I  think  they  are  an  essential  part  of 

[536] 


No.  4]  THE  SENATE  COMMITTEE  RAILROAD  BILL  25 

our  industrial  organization.  I  do  not  believe  that  we  could  long 
survive  in  peace  and  in  order  without  labor  unions.  I  think 
the  gathering  together  of  men  in  every  occupation  is  not  only 
defensible  but  I  think  it  is  highly  beneficial  and  helpful  in  the 
maintenance  of  law  and  order.  The  laboring  men  in  any  par- 
ticular enterprise  or  in  any  particular  calling  have  just  as  much 
right  to  come  together  and  work  to  promote  their  own  interests 
and  lift  themselves  up,  if  they  can,  in  the  great  scale  of  human 
society  as  have  the  men  of  capital  or  the  men  of  the  professions, 
the  men  who  labor,  as  it  is  said,  with  their  minds  instead  of  with 
their  hands.  I  do  not  want  it  to  be  understood  that  there  is  in 
this  bill  or  that  there  is  in  my  mind  any  antipathy,  any  hostility, 
anything  but  admiration  for  labor  unions. 

I  believe  also  in  collective  bargaining.  There  is  no  escape  from 
collective  bargaining.  It  is  the  decree  of  this  age  from  which 
we  ought  not  to  attempt  to  escape.  This  bill  is  founded  upon 
the  necessity  for  labor  unions,  so  far  as  the  provisions  to  which  I 
now  have  reference  are  concerned.  It  could  not  operate  without 
the  presence  of  labor  unions.  This  bill  recognizes  collective  bar- 
gaining; it  can  not  be  administered  efficiently  without  collective 
bargaining. 

It  is  said — it  has  been  said  to  our  committee — that  this  pro- 
vision of  the  bill  contravenes  the  natural  rights  of  man,  and  is 
therefore  unconstitutional.  It  is  a  very  common  thing  to  hear 
it  said  that  this  manacles  the  workingman,  puts  shackles  upon 
his  limbs,  and  reduces  him  to  involuntary  servitude.  Nothing 
could  be  more  wicked  than  an  assertion  of  that  character.  This 
bill  does  not  interfere  with  the  rights  of  any  employee  of  a  rail- 
road company  or  any  official  of  any  railroad  company,  because 
this  bill  applies  equally  to  every  person  who  serves  a  common 
carrier,  if  the  common  carrier  is  subject  to  the  act  to  regulate 
commerce.  The  bill  does  not  prevent,  interfere  with,  or  embar- 
rass any  man  who  desires  to  leave  his  employment.  He  can 
quit,  or  a  hundred  of  them  or  a  thousand  of  them  can  quit 
whenever  they  desire  so  to  do.  But  I  am  not  willing  to  allow 
the  statement  to  go  unchallenged  that  it  is  a  fundamental  and 
a  constitutional  right  that  every  man  can  enjoy  to  quit  his  em- 
ployment whenever  he  pleases.     That  is  not  true. 

This  bill  does  not  interfere  with  his  right  at  all;  but  a  soldier 
can  not  quit  whenever  he  desires.  He  can  not  cease  his  em- 
ployment.   An  engineer  upon  a  railway  train  can  not  quit  when- 

[S37] 


26  RAILROAD  LEGISLATION  [Vol.  VIII 

ever  he  may  desire  to  quit.  He  can  not  leave  his  engine  and 
his  train  so  that  human  life  would  be  imperiled,  or  so  that  prop- 
erty, even,  might  be  injured.  A  physician  or  surgeon  can  not  quit 
his  employment  whenever  he  may  desire  to  quit,  either  morally 
or  legally.  He  can  not  leave  a  dangerous  operation  half  per- 
tormed  because  it  is  his  pleasure  no  longer  to  continue  the  work 
of  his  profession.  I  am  mentioning  these  things  simply  to  show 
that  it  is  not  true,  broadly  and  fundamentally,  that  every  man 
in  the  world  can  quit  what  he  is  doing  at  any  moment  he  chooses 
to  quit.  The  human  right — and  I  am  now  speaking  of  the  in- 
dividual right  rather  than  the  group  right — is  subject  to  higher 
considerations  than  his  pleasure. 

This  bill  punishes  only  a  combination  or  agreement  between 
railway  employees,  and  when  I  use  the  word  "  employees "  I 
mean  all  the  employees  of  the  corporation,  whatever  their  rank 
may  be.  Even  if  I  were  to  grant  that  the  individual  right  to 
cease  employment  or  quit  is  perfect  and  complete,  I  could  not 
grant  that  the  right  to  enter  into  a  combination  or  conspiracy 
to  accomplish  a  purpose  inimical  to  the  welfare  of  society  is  a 
natural  or  constitutional  right.  This  bill  does  not  control  the 
individual,  but  it  controls  the  combination,  the  agreement,  and 
it  declares  that  if  two  or  more  persons,  being  employees  of  a 
carrier  subject  to  the  act  to  regulate  commerce,  shall  enter  into 
an  agreement  or  a  combination  to  suspend  or  prevent  the  move- 
ment in  interstate  commerce  of  commodities  on  which  we  are 
all  dependent  for  life  and  for  health  for  the  purpose  of  enforc- 
ing some  demand  or  claim  against  their  employer,  that  such 
persons  shall  be  guilty  of  a  misdemeanor  and  shall  be  punished 
accordingly. 

What  right  have  I,  who  may  believe  I  have  a  just  claim  against 
you,  to  enter  into  a  conspiracy  or  combination  or  agreement  with 
some  other  man  or  with  some  other  men  to  deprive  you  of  the 
necessaries  of  life  until  you  yield  to  the  demand  which  I  have 
made  upon  you?  It  is  monstrous.  It  cannot  be  defended  in  any 
court  of  morals.  A  course  of  that  kind  cannot  be  defended  in 
any  court  of  civilization  and  progress. 

The  bill  provides  what  it  believes  to  be  impartial  tribunals  for 
the  adjudication  of  all  disputes  between  the  carriers  and  their 
employees.  These  tribunals,  the  details  of  which  I  shall  not 
discuss,  have  jurisdiction  of  all  the  disputes  which  may  come 
up  from  time  to  time  between  the  railway  corporations  and  their 

[538] 


No.  4]  THE  SENATE  COMMITTEE  RAILROAD  BILL  27 

employees.  Remembering  that  we  have  provided  a  tribunal 
which  we  believe  to  be  a  just,  fair,  and  impartial  tribunal  for  the 
adjudication  of  all  controversies  of  the  character  I  have  de- 
scribed, I  hope  that  this  thought  will  be  in  every  mind,  that  we 
are  substituting  the  justice  of  the  Government  of  the  United 
States  for  the  justice  which  wage  workers  have  hoped  to  secure 
through  the  strike.  We  are  simply  exchanging  one  instrumen- 
tality for  another.  We  are  offering  an  opportunity  to  secure 
justice  which  does  not  involve  this  awful  sacrifice,  which  does 
not  involve  the  wreck  and  ruin  of  industry,  of  homes,  and  of 
character.  We  are  offering  to  do  in  controversies  out  of  which 
railway  strikes  may  arise  just  what  our  courts  of  justice  have 
done  for  centuries  with  respect  to  controversies  between  man 
and  man.  Hitherto  we  have  not  regarded  it  as  necessary  that 
our  Government  should  undertake  the  adjudication  which  is 
here  provided  for,  and  I  have  been  very  slow  and  very  reluctant 
to  go  forward  to  that  duty.  But  I  perceive,  and  I  have  long  per- 
ceived, that  it  is  necessary,  if  we  are  to  have  regularity  and 
continuity  of  employment.  Therefore  I  am  willing,  on  the  part 
of  my  Government,  to  undertake  to  do  full  and  complete  justice, 
so  far  as  wages  and  working  conditions  are  concerned,  to  those 
who  enter  into  employment  of  this  character.  I  believe,  and 
believe  from  the  bottom  of  my  heart,  that  the  laboring  men  of 
America  will  be  more  apt  to  secure  justice  or  approach  perfect 
justice  through  the  intervention  of  these  tribunals  for  the  settle- 
ment of  their  disputes  than  they  have  ever  been  able  to  secure 
through  the  medium  of  the  strike. 


[539] 


THE  HOUSE  COMMITTEE  RAILROAD  BILL 

HON.  SCHUYLER  MERRITT,  M.C., 
Member  House  Committee  on  Interstate  and  Foreign  Commerce 

AFTER  sitting  for  three  months  with  the  Interstate  Com- 
merce Committee  in'  hearings  which,  when  printed,  occu- 
pied between  three  and  four  thousand  pages,  and  after 
spending  several  weeks  shaping  the  Esch  Bill  in  Committee  and 
passing  it  through  the  House,  I  had  the  pleasure  of  a  call  from 
the  President  of  the  Academy  of  Political  Science,  who  did  me 
the  honor  to  ask  me  to  summarize  and  characterize  the  bill  in  a 
twenty-minute  address  at  the  Academy's  annual  meeting.  I 
immediately  thought  of  the  old  and  well-known  story  of  the 
colored  gentleman  who  was  asked  for  a  loan  of  ten  dollars.  He 
said,  "Boss,  I  thank  you  for  the  compliment,  but  I  haven't  got 
the  money." 

I  think  before  I  even  attempt  to  summarize  the  bill  which  has 
been  passed  by  the  House  it  is  only  justice  for  me  to  pay  tribute 
to  the  sub-committee  of  the  House,  headed  by  Mr.  Esch  of  Wis- 
consin, who  is  also  the  Chairman  of  the  full  Committee,  for  their 
labors  in  this  field.  Mr.  Esch  has  been  a  member  of  the  Inter- 
state Commerce  Committee  for  many  years;  he  has  taken  part 
in  all  the  great  measures  which  have  been  passed  in  recent  years 
to  regulate  the  railways  of  this  country.  He  is  a  man  of  great 
ability,  with  a  judicial  and  honest  mind.  And  if,  as  I  believe, 
the  labors  of  himself  and  his  Committee  have  resulted  in  some 
contribution  to  a  proper  solution  of  this  question,  Mr.  Esch  is 
entitled  to  and  should  receive  the  appreciation  of  bodies  like  this 
and  of  the  whole  country.    s 

Those  of  you  who  are  old  enough — not  many,  I  think — will 
remember  that  when  a  conservative  deacon  in  the  church  of 
Henry  Ward  Beecher  reproached  him  for  something  startling 
or  daring  which  he  had  said  during  a  sermon,  Beecher  replied, 
"If  you  only  knew  some  of  the  things  I  didn't  say  you  would 
praise  me  instead  of  blame  me."  And  so  I  think  that  whatever 
you  may  criticize  in  the  bill  which  we  actually  have  passed,  you 
will  at  least  praise  us  for  some  things  that  we  have  not  passed. 
You  will  agree  that  we  did  well  in  not  putting  anything  into  the 

[540] 


No.  4]  THE  HOUSE  COMMITTEE  RAILROAD  BILL  29 

bill  which  even  looked  toward  public  ownership.  The  Com- 
mittee, from  testimony  and  from  independent  study,  became 
convinced  that  in  all  the  states  which  had  public  ownership,  such 
for  example  as  Australia  and  France,  where  the  conditions  were 
not  different  from  ours,  the  service  was  poorer,  was  more 
expensive  and  was  tainted  by  politics.  Nor  was  the  Committee 
much  influenced  by  the  very  long  and  able  presentation  of  the 
plan  called  the  Plumb  Plan.  This  plan,  as  you  know,  contem- 
plated the  purchase  of  all  the  railways  of  the  United  States  by  the 
Government  and  turning  them  over  to  be  operated  by  the  mem- 
bers practically  of  the  four  great  railway  brotherhoods. 

It  was  called  in  some  of  the  literature  that  was  put  out  an 
experiment  or  possibly  a  demonstration  in  democracy  in  the 
ownership  and  control  of  the  railways.  I  agree  that  the  Plumb 
Plan  would  be  the  embodiment  of  democracy  in  ownership  be- 
cause all  the  bills  for  buying  the  railroads  amounting  to  some 
eighteen  or  twenty  billions  of  dollars  would  be  footed  by  the 
public.  But,  when  it  comes  to  the  control,  which  is  to  be  vested, 
under  that  plan,  in  fifteen  directors,  two-thirds  of  whom  are  to  be 
elected  in  one  way  or  another  by  the  approximately  two  million 
employees  of  the  railroads,  that  seems  to  me  to  be  a  case  of  in- 
troducing into  this  country  the  Soviet  on  a  large  scale,  because 
you  have  two  million  people,  something  less  than  two  per  cent 
of  the  population,  electing  the  directors  to  run  the  property 
which  is  bought  by  all  the  people.  That  property  controls  the 
entire  industrial  life  of  this  country. 

In  addition  to  that,  you  will  perceive  that  these  two  million 
men  would  be  both  employers  and  employed,  and,  if  anything 
could  tend  to  expense  and  to  demoralization  more  than  that,  I 
do  not  know  what  it  is.  If  I  should  characterize  the  Plumb  Plan 
in  a  large  way,  I  should  say  that  it  was  a  plan  for  two  per  cent 
of  the  population  to  elect  a  board  of  fifteen  men  to  control  the 
industrial  life  of  this  country,  and  secondly,  a  plan  to  drive 
brains  out  of  running  the  railroads.  I  say  that  last,  because  you 
can  see  what  a  tremendous  amount  of  wire  pulling  and  politics 
would  occur  at  once  among  the  two  million  men  on  these  roads 
to  elect  people  to  run  them. 

As  it  happens,  the  estimated  wealth  of  the  State  of  New  York, 
the  entire  State  of  New  York,  is  just  about  the  same  amount 
as  is  invested  in  railways  to-day,  and  the  number  of  voters  is 
just  about  the  same  in  the  State  of  New  York  as  would  be  in  the 

[S4l] 


30  RAILROAD  LEGISLATION  [Vol.  VIII 

railroads  under  the  Plumb  Plan.  Some  of  you  know  how  much 
politics  goes  on  in  the  effort  to  run  the  State  of  New  York.  But 
I  do  not  think  it  would  be  a  circumstance  to  the  politics  that 
would  go  on  in  the  effort  to  run  the  railways,  because  the  prize 
would  be  so  much  greater  and  the  power  would  be  so  much 
greater.  I  think  we  can  all  agree  that  a  book  which  President 
Hadley  wrote  thirty  years  ago  contained  a  prediction  which  cir- 
cumstances have  shown  to  be  very  true  in  connection  with  state- 
owned  railways  and  to  be  still  more  true  with  the  relation  to 
railways  run  under  this  Plumb  Plan.  President  Hadley  in  his 
book  said  that  the  state  is  more  likely  to  tax  industry  than  to 
foster  it,  that  state  management  is  more  costly  than  private  man- 
agement, that  the  political  danger  would  be  very  great,  that 
politics  would  tend  to  corrupt  the  railway  management  and  the 
railway  management  would  tend  to  corrupt  politics. 

I  should  not  have  taken  even  this  amount  of  time  to  speak  of 
the  Plumb  plan  were  it  not  for  the  fatal  facility  which  so  many 
people  have  for  being  deluded  by  pleasant  sounding  words,  and 
the  fatal  habit  which  they  have  also  of  failing  to  examine  the 
real  effects  of  the  plan  covered  by  these  words. 

So,  for  those  reasons,  as  well  as  others,  it  seemed  to  us  that 
our  duty  and  the  work  before  us  was  to  retain,  so  far  as  we 
could,  that  far-sightedness,  that  efficiency,  and  that  business 
ability  which  had  made  the  railway  system  of  the  United  States 
the  greatest  system  with  the  lowest  rates  and  the  best  system  to 
serve  the  people  that  the  world  has  ever  seen. 

Now,  in  its  structure,  the  bill  which  has  passed  the  House 
of*  Representatives  takes  up  three  phases  of  the  matter.  First, 
the  actual  return  of  the  roads;  second,  the  necessary  period  for 
reestablishment  of  personnel  and  ordinary  operation  of  the  roads 
under  their  owners,  and,  third,  the  question  of  their  continued 
operation.  v 

In  the  beginning,  the  Committee  felt  bound  to  take  into  ac- 
count the  reasons  why  this  problem  exists.  They  could  not  take 
up  the  problem  as  if  the  roads  were  in  the  hands  of  the  govern- 
ment by  negotiation  or  through  the  will  of  their  owners.  They 
had  to  consider  the  problem  as  it  exists,  which  is,  that  the  roads 
were  taken  over  without  the  consent  of  their  owners,  by  operation 
of  law. 

During  the  period  of  operation  by  the  government  many  hun- 
dreds of  millions  of  debts  were  incurred  by  the  government  on 

[542] 


No.  4]  THE  HOUSE  COMMITTEE  RAILROAD  BILL  31 

behalf  of  the  roads,  without  the  consent  of  the  owners,  without 
their  advice  and  at  war  prices.  Now,  this,  it  seemed  to  the  Com- 
mittee, and  I  think  it  would  seem  to  any  fair  man,  makes  a  very 
strong  equitable  claim  against  the  government  on  behalf  of  the 
roads,  and  practically  forces  the  government,  during  this  period 
of  reconstruction,  at  least,  and  to  the  extent  that  the  debts  were 
incurred  during  war  service,  to  act  as  banker  for  the  roads. 
That  involves,  of  course,  funding  in  some  form  the  debts  which 
the  roads  will  owe  to  the  government  on  settlement  and  the  bill 
provides  (without  troubling  you  with  too  much  detail  and  too 
many  figures)  that  the  debts  on  account  of  capital  expenditures 
shall  be  repaid  in  fifteen  years,  payments  to  begin  in  five  years. 
I  may  say,  in  passing,  that  this  particular  clause  was  the  object 
of  a  great  deal  of  controversy  in  the  House  and  the  bill  as  finally 
amended  into  its  present  form  is  not  in  this  respect,  as  many 
think,  and  I  am  one  of  them,  quite  so  generous  to  the  roads  as  it 
should  be.  And,  when  I  say  generous  to  the  roads,  I  mean  in 
the  interest  of  the  proper  solution  of  the  whole  question. 

It  may  be  proper  for  me  at  this  point  to  make  a  comparison 
with  the  Senate  committee  bill  whose  refunding  provision  is  more 
generous  to  the  roads  than  the  provision  which  the  House  passed. 
Therefore  in  the  bill  which  finally  passes  the  Senate  and 
comes  to  conference,  there  may  be  a  favorable  modification.  Of 
course  that  is  in  the  future  and  I  cannot  tell.  The  other  debts 
of  the  roads  are  to  be  paid  to  the  government  in  demand  notes 
secured  by  such  collateral  as  may  be  available.  Then  there  is  a 
provision  that  if,  owing  to  their  needs  or  the  conditions  of  the 
money  market  during  two  years  after  the  roads  are  returned,  they 
find  themselves  short  of  funds,  there  is  created  a  revolving  fund 
of  two  hundred  and  fifty  million  dollars,  from  which  the  Presi- 
dent in  his  discretion  and  under  proper  safeguards  may  make 
loans  to  the  roads.  And  finally,  to  give  the  roads  time  to  turn 
about,  and  to  recover  their  organizations  and  go  on  their  normal 
way,  the  guarantee  of  the  standard  return  is  continued  for  six 
months  after  the  roads  are  taken  over. 

That  takes  care  of  the  transition  period,  it  is  hoped.  Then 
comes  the  question  of  continued  operation;  and  while  I  do  not 
pretend  to  know  the  Senate  Bill  as  intimately  as  I  do  the  House 
Bill,  at  this  point  the  two  bills  separate  widely.  It  was  strongly 
urged  before  the  Senate  and  before  the  House  that  a  Transpor- 
tation Board  be  created  which  should  be  a  body  apart  from  the 

[543] 


32  RAILROAD  LEGISLATION  [Vol.  VIII 

Interstate  Commerce  Commission,  and  which  should  take  cer- 
tain of  the  executive  duties  of  the  Commission,  but  apart  from 
that  and  more  important  than  that,  this  Board  was  to  take  a 
broad  view  of  the  transportation  needs  and  the  transportation 
facilities  and  service  of  the  United  States  without  regard  to  par- 
ticular roads,  and  to  consider  what  was  to  the  interest  of  the 
United  States  by  way  of  proper  transportation  facilities.  The 
Board  also  was  to  consider  what  operating  revenues  were  neces- 
sary adequately  to  support  such  service.  It  was  to  make  certain 
recommendations  to  Congress  and  to  the  Interstate  Commerce 
Commission  and  the  Commission  was  to  make  rates  based  on 
facts  and  recommendations  which  were  to  be  put  before  them 
by  this  Transportation  Board. 

That  is  substantially  in  the  Senate  Bill,  but  the  House  of 
Representatives,  and  its  Committee,  has  been  and  is  averse  to 
adding  to  the  great  number  of  Boards  and  Committees  now  in 
Washington  transacting  the  business  of  the  United  States.  A 
board  created  by  Congress  differs  from  almost  everything  else 
created  by  man.  You  all  know  that  most  human  creations  con- 
tain within  themselves  the  forces  of  decay  and  the  great  diffi- 
culty is  to  keep  them  alive,  but  when  you  create  a  board  in  Wash- 
ington it  seems  to  contain  the  seed  of  eternal  life  and  growth, 
and  the  difficult  thing  is  to  kill  it.  So  we  thought  that  we  would 
rather  stick  to  the  evils  that  we  know  about  than  to  create  others 
that  we  knew  not  of.  Our  effort  was  to  increase  the  powers  and 
perfect  the  means  of  operation  of  the  Interstate  Commerce  Com- 
mission. We  tried  to  profit  by  the  knowledge  and  experience 
which  have  come  during  the  war  from  unified  control,  so  we  have 
given  to  the  Commission  enlarged  powers  by  way  of  unifying 
terminal  facilities  and  the  use  of  rolling  stock,  etc.,  so  that  the 
greatest  benefit  can  be  had  from  facilities  which  now  exist.  We 
have  gone  quite  far;  if  you  had  been  in  the  House  and  heard 
the  oratory  of  the  representatives  of  some  states  you  would  have 
thought  we  had  gone  too  far,  in  extending  the  powers  of  the 
Interstate  Commerce  Commission  over  all  rates,  both  state  and 
interstate.  Those  of  you  who  are  lawyers  know  the  Shreveport 
case.  We  have  put  that  case  into  statute  law  and  extended  it,  I 
think  the  lawyers  believe,  somewhat  beyond  the  Supreme  Court 
decision.  If  I  can  put  my  hand  upon  it  I  will  read  a  portion  of 
the  act.  I  do  not  want  to  take  too  much  of  your  time,  but  the 
matter  is  important.    Great  difficulty,  confusion  and  loss  has  been 

[544] 


No.  4J  THE  HOUSE  COMMITTEE  RAILROAD  BILL  33 

experienced  by  railroads  because  state  commissions  made  rates 
for  intrastate  business  far  below  interstate  rates.  The  low  state 
rates  caused  loss  to  the  roads  and  threw  an  undue  burden  on 
interstate  business.  It  is  now  provided  that  if  any  road  thinks 
it  is  discriminated  against  by  a  state  commission,  it  can  bring  a 
complaint  before  a  joint  session  of  the  Interstate  Commission  and 
the  State  Commission  involved  and  then  the  act  goes  on  as 
follows : 

"The  Commission  shall  have  authority,  after  full  hearing,  to 
make  such  findings  and  orders  as  may  in  its  judgment  tend  to 
remove  any  undue  advantage,  preference,  or  prejudice  as  between 
persons  or  localities  in  intrastate  commerce  on  the  one  hand  and 
interstate  or  foreign  commerce  on  the  other  hand,  or  any  undue 
burden  upon  interstate  or  foreign  commerce,  which  is  hereby 
forbidden  and  declared  to  be  unlawful,  and  such  findings  or 
orders  shall  be  observed  while  in  effect  by  the  carriers  parties  to 
such  proceeding  affected  thereby,  the  law  of  any  State  or  the 
decision  or  order  of  any  State  authority  to  the  contrary  notwith- 
standing." 

That  paragraph  will  commend  itself  to  the  lawyers  present,  I 
think,  as  a  very  beneficial  part  of  the  act  and  one  which  is  very 
far  reaching.  Another  provision  of  our  act  which  I  think  good, 
is  this,  that  after  these  rates  are  established  by  law  as  fair 
and  reasonable,  every  road  can  make  all  the  money  and  all  the 
profit  it  can  out  of  these  legal  rates,  and  what  is  better,  keep  it 
after  it  has  made  it.  It  was  urged  by  a  large  and  influential  body 
of  gentlemen,  and  very  ably  argued  that  rates  should  be  estab- 
lished to  produce  a  definite  percentage  of  return  on  the  value  of 
the  property  used  in  transportation.  Our  Committee  felt,  and 
the  House  acted  upon  its  recommendation  that  if  that  were  done, 
it  would  go  far  toward  removing  incentive  and  toward  removing 
initiative,  efficiency  and  the  necessity  of  economy.  Then  we 
thought  further  that  if  after  a  road  by  good  management  had 
made  a  certain  percentage  of  profit,  it  would  certainly  not  be  any 
incentive  to  further  effort  to  take  away  from  it  the  extra  profit 
it  might  earn  by  economy  and  good  judgment  and  foresight. 

However  much  the  act  which  we  framed  may  be  criticized  in 
some  of  its  details,  it  has  these  broad  features,  that  it  gives  the 
.  Interstate  Commerce  Commission  power  to  control  the  roads,  it 
gives  the  Commission  power  and  modifies  to  that  extent  the  anti- 
trust laws,  to  permit  combinations  and  pooling  so  that  the  entire 

[S45] 


34  RAILROAD  LEGISLATION  [Vol.  VIII 

system  of  railroads  in  this  country  can  be  treated  as  a  whole  and 
used  as  a  whole  for  the  benefit  of  the  commerce  of  the  whole 
country.  In  addition  to  that,  it  does  not  destroy  competition  of 
service,  it  does  not  take  from  a  carrier  the  earnings  which  it  can 
get  from  good  service,  economy  and  efficiency  and  from  wise 
foresight  in  making  extensions  or  combinations. 

I  have  left  to  the  last  a  subject  which  is  perhaps  the  most 
difficult  of  all,  and  that  is  the  question  of  labor  on  the  railroads. 
The  provision  which  is  in  the  bill  that  passed  was  put  in  as  an 
amendment.  The  provision  which  the  Committee  reported  to  the 
House  was  not  one  which,  in  the  current  phrase,  had  "teeth."  It 
was  really  a  mild  form  of  compulsory  arbitration.  But  that  was 
defeated,  and  the  present  clause  put  into  the  bill.  That  was  done 
in  the  haste  of  debate,  under  what  is  called  in  the  House,  the  five- 
minute  rule,  so  that  extended  debate  and  examination  were  hardly 
possible.  I  cannot  help  feeling  that  if  the  provision  which  is  in 
the  bill  could  have  been  debated  and  could  have  been  understood, 
it  would  hardly  have  been  passed.  This  bill  on  its  face  would 
look  like  a  bill  for  conciliation  and  arbitration,  but  if  it  is  ex- 
amined critically,  it  will  be  found  that  if  disputes  which  arise  are 
not  settled  by  certain  boards  created  by  the  bill. — if  it  comes  to  a 
point  where  the  men  cannot  agree  with  the  carriers, — that  the 
only  way  to  get  that  dispute  before  the  final  board  of  appeals 
created  by  the  bill  is  by  the  consent  of  the  officers  of  the  brother- 
hoods. In  other  words,  it  is  compulsory  arbitration  if  the 
brotherhoods  want  it,  and  is  nothing  if  they  do  not  want  it.  There 
is  no  possible  way  for  the  roads  to  get  any  of  the  disputes  before 
these  boards  without  the  consent  of  the  brotherhoods.  That  is 
one  thing  that  seems  to  me  to  be  one-sided. 

There  is  another  section  of  the  bill  which  provides  that  the 
wage  rates  and  other  arrangements  which  have  been  made  under 
the  stress  of  war  shall  remain  at  their  present  level  until  the 
employees  will  agree  that  they  may  be  lowered.  That,  you  see,  is 
introducing  into  this  Bill  the  worst  feature  of  the  Adamson  Act, 
only  raised  to  the  nth  power.  I  cannot  believe  that  even  the  men 
themselves  when  they  come  to  understand  this  will  feel  that  that 
is  a  fair  arrangement.  It  seems  to  me  before  this  bill  becomes 
a  law  that  those  parts  of  it  at  least  must  be  examined  carefully 
and  modified  to  the  extent  of  making  them  equally  fair  to  both 
sides. 

I    think    perhaps    that    what    I    have    said    indicates    what 

[546] 


No.  4]  THE  HOUSE  COMMITTEE  RAILROAD  BILL  35 

you  all  knew  before  I  said  it — that  this  railway  question  is  one 
of  the  most  difficult  and  intricate  questions  which  has  ever  come 
up  for  settlement  in  this  country.  I  doubt  if  anyone  who  has  not 
sat  for  months  in  a  committee  room  listening  to  representatives 
of  carriers  and  shippers  and  representatives  of  the  employees, 
all  the  way  from  Maine  to  Texas,  and  from  New  York  to  Alaska, 
can  appreciate  how  complex  and  how  far  reaching  these  questions 
are.  I  doubt  if  any  other  question  can  more  truly  be  said  to 
touch  every  man  and  woman  in  this  country.  What  we  were 
impressed  with,  and  most  agreeably  impressed  with  during  all  the 
hearings  was  the  broad  spirit  which  was  shown  by  all  representa- 
tives of  all  interests  before  the  Committee.  They  all  appreciated 
that  the  problem  was  not  local,  was  not  confined  to  them  or  to 
their  interest,  but  it  had  to  do  with  the  erecting  in  this  country  of 
a  great  transportation  machine,  and  you  know,  and  they  know, 
that  in  order  to  make  that  machine  an  efficient  machine,  it  must 
be  supported.  Without  sufficient  rates  to  make  reparation  for 
wear  and  tear  and  to  create  a  credit  basis  for  extensions  and  new 
roads  to  meet  the  growth  of  this  country,  the  machine  will  be 
overloaded  and  break  down.  Therefore  the  influence  of  this 
great  Academy  and  of  all  thinking  people  must  be  exerted  to  the 
end  that  the  country  will  view  the  question  in  a  broad  way.  And 
you  must  see  to  it  that  men  in  Congress  and  elsewhere  are  im- 
pressed with  the  importance,  not  of  criticising  what  has  been  done 
in  the  past,  not  of  trying  to  make  this  generation  suffer  for  the 
sins  of  the  past  generation,  but  of  considering  facts  as  they  are 
and  doing  all  we  can  to  help  this  great  transportation  system,  be- 
cause if  that  is  prosperous,  the  whole  country  will  and  must  be 
prosperous. 

I  can  truly  say  to  you  that  the  Interstate  Commerce  Committee 
of  the  House  and  I  believe  the  House  itself,  approached  this  ques- 
tion in  that  spirit  and  the  result  of  its  efforts,  I  think,  is  a  con- 
tribution to  the  solution  of  the  question. 


[S47] 


THE  LEGISLATIVE  PROGRAM  OF  THE  INTERSTATE 
COMMERCE  COMMISSION 

BALTHASAR  H.  MEYER 
Interstate  Commerce  Commissioner 

BEFORE  outlining  .what  has  been  called  the  legislative 
program  of  the  Interstate  Commerce  Commission  I 
wish  to  offer  two  preliminary  observations. 
First,  to  speak  of  a  legislative  program  of  the  Interstate  Com- 
merce Commission  is  to  use  figurative  language.  We  are  not  a 
legislative  body.  We  do  not  legislate.  We  therefore  have  no 
legislative  program  in  the  accepted  sense  of  the  term.  We  are 
an  arm  of  Congress.  We  are  responsible  directly  and  solely  to 
it.  It  is  not  our  function  to  prescribe  public  policy  but  rather  to 
conform  our  actions  to  the  public  policy  prescribed  by  Con- 
gress. To  the  extent  that  we  exercise  administrative  discretion 
within  the  limits  of  the  act  to  regulate  commerce,  that  discretion 
is  exercised  in  the  direction  of  what  we  construe  to  be  the  inten- 
tion of  Congress.  However,  we  are  required  from  time  to  time 
to  make  recommendations  to  Congress.  Section  21  of  the  act  to 
regulate  commerce  reads,  in  part,  as  follows: 

*  *  The  Commission  shall,  on  or  before  the  first  day  of  December  in 
each  year,  make  a  report,  which  shall  be  transmitted  to  Congress,  *  *  * 
This  report  shall  contain  such  information  and  data  collected  by  the  Com- 
mission as  may  be  considered  of  value  in  the  determination  of  questions 
connected  with  the  regulation  of  commerce,  together  with  such  recom- 
mendations as  to  additional  legislation  relating  thereto  as  the  Commission 
may  deem  necessary.    *    *    * 

In  addition  to  recommendations  made  in  our  annual  reports 
we  have  occasionally  sent  special  reports  to  Congress  making 
recommendations  on  particular  subjects.  The  most  noteworthy 
of  these  were  the  reports  submitted  in  December,  1917  and  1918, 
respectively. 

In  common  doubtless  with  others,  I  have  been  asked  many 
times  to  suggest  a  "permanent  solution  of  the  railroad  problem." 
I  have  invariably  expressed  my  inability  to  do  so.  I  do  not 
believe  any  man  can  offer  a  permanent  solution  of  the  railroad 
problem.  There  is  no  such  thing  as  a  permanent  solution.  The 
problem  is  permanent,  not  the  solution.  This  is  the  second  pre- 
liminary observation  that  I  wish  to  offer. 

[548] 


No.  4]  THE  LEGISLATIVE  PROGRAM  37 

The  railway  itself  as  we  now  know  it  may  not  prove  to  be  as 
permanent  an  institution  as  we  are  accustomed  to  think  it  to  be. 
Even  though  time  should  demonstrate  it  to  be  such,  it  does  not 
follow  that  legislation  governing  the  use  of  the  railroad  and 
prescribing  relations  between  owners  and  users  and  workers  can 
be  permanent.  Perhaps  no  lesson  in  history  has  been  more 
forcefully  and  repeatedly  brought  home  to  every  thinking  man 
than  the  changing  character  of  our  .institutions.  One  of  the 
highest  functions  of  the  legislator  and  the  administrator  is  to 
adapt  these  institutions  to  the  conditions  of  time,  place  and  cir- 
cumstance. Having  accomplished  this  adaptation,  all  has  been 
done  that  can  be  done.  This  applies  to  railways  and  the  railway 
program  as  much  as  it  applies  to  taxation,  education,  suffrage, 
police  regulations  and  all  other  matters  governing  or  affecting 
the  conduct  and  well-being  of  citizens.  A  legislative  program 
for  railways  which  is  the  best  that  competent  men  can  elaborate 
for  to-day  is  not  necessarily  the  best  to  be  applied  five  or  ten 
years  from  now  when  conditions  may  be  different.  Scarcely  a 
session  of  Congress  or  of  a  state  legislature  passes  but  what  some 
statute  relating  to  railways  is  enacted  because  new  conditions 
require  new  laws.  Congress  has  found  it  necessary  to  conduct 
extensive  hearings  and  undertake  fundamental  changes  in  laws 
relating  to  railways  about  every  10  years  or  oftener  ever  since 
the  conduct  of  railways  has  become  a  national  problem.  Nat- 
urally legislators  look  to  the  future  and  attempt  to  adjust 
legislation  to  future  requirements  as  fully  as  possible;  but  gen- 
erally it  is  impossible  to  foresee  requirements  and  contingencies 
five  or  ten  years  hence.  I  speak  at  some  length  of  this  for  the 
reason  that  it  can  help  no  one  to  labor  under  the  delusion  that 
any  man  or  body  of  men  can  work  out  a  real,  permanent  solution. 

The  statutory  structure  must  constantly  be  readjusted  to  the 
social  and  economic  structure.  Laws  generally  follow,  not  pre- 
cede, economic  and  social  changes.  They  should  follow  changes 
as  closely  as  possible.  Some  times  they  follow  with  painful 
slowness  so  that  by  the  time  they  are  finally  written  upon  the 
books  the  changes  which  they  were  designed  to  meet  have  been 
superseded  by  other  changes  which  they  cannot  meet  and  which 
themselves  require  still  further  changes.  From  this  point  of  view 
the  best  "permanent"  solution  is  that  which  is  most  adaptable  to 
changing  conditions.  I  am  here  referring  to  legislation  relating 
to  the  general  conduct  of  the  railways.     When  we  contemplate 

[549] 


38  RAILROAD  LEGISLATION  [Vol.  VIII 

questions  of  rates  and  service  we  see  that  which  is  ever  changing 
and  ever  present.  No  matter  what  legislative  and  administrative 
changes  are  made,  questions  of  rates  and  service  remain.  In 
general  and  in  principle  they  are  always  the  same.  Whether 
Congress  adopts  the  Cummins  plan,  the  Esch  plan,  the  Lenroot 
plan,  the  Plumb  plan,  the  Railway  Executives'  plan,  the  Warfield 
plan,  the  Chamber  of  Commerce  plan,  or  any  other  plan  or  com- 
bination of  plans,  problems  of  rates  and  service  will  demand 
consideration  on  their  merits  and  in  their  varied  aspects  of 
changing  industrial  and  social  conditions  and  interests. 

Coming  now  concretely  to  the  legislative  program  of  the  Inter- 
state Commerce  Commission  I  wish  to  cite  briefly  from  our 
annual  report  to  Congress  in  December,  1918: 

While  we  do  not  deem  the  present  conditions  and  moment  opportune 
in  which  to  recommend  concrete  proposals  for  legislation,  we  may  indi- 
cate certain  lines  of  inquiry  which  must  be  pursued  in  order  to  reach 
sound  conclusions. 

Whatever  line  of  policy  is  determined  upon,  the  fundamental  aim  or 
purpose  should  be  to  secure  transportation  systems  that  will  be  adequate 
for  the  nation's  needs  even  in  time  of  national  stress  or  peril  and  that 
will  furnish  to  the  public  safe,  adequate,  and  efficient  transportation  at 
the  lowest  cost  consistent  with  that  service.  To  this  end  there  should  be 
provision  for  (1)  the  prompt  merger  without  friction  of  all  the  car- 
riers' lines,  facilities,  and  organizations  into  a  continental  and  unified 
system  in  time  of  stress  or  emergency;  (2)  merger  within  proper  limits 
of  the  carriers'  lines  and  facilities  in  such  part  and  to  such  extent  as 
may  be  necessary  in  the  general  public  interest  to  meet  the  reasonable 
demands  of  our  domestic  and  foreign  commerce;  (3)  limitation  of 
railway  construction  to  the  necessities  and  convenience  of  the  govern- 
ment and  of  the  public,  and  assuring  construction  to  the  point  of  these 
limitations ;  and  (4)  development  and  encouragement  of  inland  water- 
ways and  coordination  of  rail  and  water  transportation  systems. 

This  statement  was  followed  by  an  enumeration  of  various 
plans  which  we  thought  might  be  brought  to  the  attention  of 
Congress.  Next  we  described  considerations  which  required 
attention  if  the  policy  of  private  control  and  operation  or  public 
ownership  and  operation,  respectively,  were  to  be  adopted. 

Not  long  after  our  annual  report  had  been  submitted  to  Con- 
gress we  were  asked  by  the  Committee  on  Interstate  Commerce 
of  the  United  States  Senate  to  submit  "available  data  and  other 
information  bearing  on  the  railroad  situation  in  the  country." 
Responsive  to  this  request  we  submitted  a  statement  outlining  our 
views  in  more  detail  than  had  been  done  in  the  annual  report. 
These  views  were  predicated  upon  the  continuance  of  private 
ownership  and  operation  under  regulation,  and  were  approved  by 
every  member  of  the  Commission  as  it  was  then  constituted  ex- 
cept one.     The  statement  was  framed  upon  the  outline  in  our 

[SSO] 


No.  4]  THE  LEGISLATIVE  PROGRAM  39 

annual  report  relating  to  private  ownership,  for  by  this  time  we 

had  decided  to  favor  that  alternative.    Its  contents  are  indicated 

as  follows : 

If  the  policy  of  private  ownership  and  operation  under  regulation  is 
continued,  the  following  subjects  will  require  legislative  consideration: 
(1)  Revision  of  limitations  upon  united  or  cooperative  activities  among 
common  carriers  by  rail  or  by  water;  (2)  emancipation  of  railway  opera- 
tion from  financial  dictation;  (3)  regulation  of  issues  of  securities; 
(4)  establishment  of  a  relationship  between  Federal  and  state  authority 
which  will  eliminate  the  twilight  zone  of  jurisdiction  and  under  which 
a  harmonious  rate  structure  and  adequate  service  can  be  secured,  state 
and  interstate;  (5)  restrictions  governing  the  treatment  of  competitive 
as  compared  with  noncompetitive  traffic;  (6)  the  most  efficient  utiliza- 
tion of  equipment  and  provision  for  distributing  the  burden  of  furnish- 
ing equipment  on  an  equitable  basis  among  the  respective  carriers ;  (7) 
a  more  liberal  use  of  terminal  facilities  in  the  interest  of  free  move- 
ment of  commerce;  and  (8)  limitations  within  which  common  carrier 
facilities  and  services  may  be  furnished  by  shippers  or  receivers  of 
freight. 

Some  time  after  we  had  received  the  request  from  the  Senate 
Committee,  a  similar  request  was  made  by  the  Committee  on 
Interstate  and  Foreign  Commerce  of  the  House  of  Representa- 
tives. We  met  these  requests  as  fully  as  possible.  In  addition 
to  the  formal  statement  we  submitted  statistical  data  and  other 
information,  supplemented  by  extensive  oral  testimony  most 
ably  presented  by  our  senior  colleague,  Commissioner  Clark. 

The  above  in  brief  is  what  has  been  called  the  legislative  pro- 
gram of  the  Interstate  Commerce  Commission.  As  previously 
stated,  a  number  of  other  plans  have  been  brought  to  the  atten- 
tion of  both  houses  of  Congress.  It  is  not  for  me  to  say  what 
Congress  ought  to  do.  Both  the  Senate  and  the  House  com- 
mittees have  worked  strenuously  for  many  months.  They  have 
heard  what  we  have  had  to  say  respecting  our  suggestions  and 
what  others  have  had  to  say  about  their  respective  plans.  Both 
committees  have  reported  bills  to  their  respective  houses.  The 
decision  now  rests  with  Congress.  It  will  do  what  it  conceives 
to  be  in  the  best  interests  of  the  whole  country. 

I  now  wish  to  offer  some  observations  with  respect  to  the 
legislative  recommendations  stated  above  within  the  time  limits 
imposed  by  your  program.  Fortunately  others  will  deal  with 
various  important  related  subjects  which  I  cannot  even  mention. 

First  of  all,  our  recommendations  are  based  upon  experience 
and  past  development.  They  have  grown  out  of  that  which  has 
been,  and  therefore  have  their  roots  in  the  past.  To  illustrate, 
from  the  beginning  of  railway  history,  individual  lines  have  been 
extended  through  construction,  purchase  or  lease  into  systems; 

[SSI] 


40  RAILROAD  LEGISLATION  [Vol.  VIII 

and  through  a  continuing  process  of  construction  and  consolida- 
tion great  systems  have  been  developed.  We  favor  a  continuance 
of  that  character  of  development  within  the  limits  and  under  the 
guidance  of  the  statute,  whereas  in  the  past  that  development  has 
taken  place  largely  outside  of  the  law. 

We  have  not  deemed  it  necessary  to  work  out  special  regulatory 
provisions  relating  to  the  so-called  poor  or  weak  roads  as  con- 
trasted with  the  so-called  strong  or  affluent  roads.  Railroads 
have  in  the  past  earned  varying  rates  of  profit.  We  see  no 
reason  why  they  should  not  continue  to  do  so  in  the  future.  In 
view  of  well  understood  imperfections  in  the  investment  in 
property  accounts  of  carriers  it  has  been  generally  impossible 
to  know  just  what  different  carriers'  earnings  have  been  on  the 
real  investment.  When  the  necessary  facts  are  available  I  expect 
they  will  show  that  in  some,  if  not  in  many,  cases  the  so-called 
weak  road  is  actually  making  more  money  on  such  business  as 
it  does  than  many  of  the  strong  or  supposedly  affluent  roads. 
This  feature  of  the  railroad  situation  has  been  practically  ignored. 

Our  recommendations  do  not  lead  to  a  hybrid  system  of  rail- 
roads in  the  United  States.  There  will  result  from  them  no  such 
linking  of  private  and  public  finance  and  accounts  that  it  will  be 
difficult  to  know  what  is  public  and  what  is  private  and  what  the 
true  results  of  operation  may  be  from  the  standpoint  of  both 
public  and  private  interest.  Personally,  I  have  a  strong  aversion 
toward  all  plans  that  propose  to  weave  together  public  and  private 
interests  in  such  a  way  that  a  clear-cut  accounting  representing 
either  is  practically  impossible.  Rather  than  accept  some  of  these 
plans  I  should  deem  it  the  part  of  wisdom  to  enter  upon  govern- 
ment ownership  and  operation  outright.  I  do  not  believe  the 
time  has  come  for  this  country  to  enter  upon  public  ownership 
of  railroads.  I  believe  that  what  we  have  recommended  will 
meet  the  present  situation  much  more  effectively  and  with  less 
danger  of  failure  than  government  ownership.  However,  if  the 
country  should  be  driven  into  government  ownership  it  will 
undertake  it  with  courage  and  vision  and  make  it  a  success.  It 
can  be  done.  I  do  not  wish  to  see  it  forced  upon  the  country  at 
this  time. 

Our  recommendations  do  not  assume  to  be  a  panacea  for  all 
the  difficulties  in  the  world  of  transportation.  It  is  a  practical 
program  which  rests  upon  experience  and  observation.  I  am 
well  aware  that  various  apparently  simple  plans  have  their  sup- 

[552] 


No.  4]  THE  LEGISLATIVE  PROGRAM  41 

porters.  If  a  simple  plan  will  accomplish  that  which  is  sought, 
it  is  preferable  to  a  plan  less  simple.  That  requires  no  argument. 
However,  I  do  not  believe  that  any  one  who  will  analyze  ob- 
jectively the  entire  transportation  situation  in  this  country  to-day 
will  find  a  state  of  affairs  that  lends  itself  to  treatment  under  a 
simple  uniform  rule.  This  great  country  is  full  of  mountains 
and  valleys  and  plains,  rivers  and  lakes,  big  cities  and  little  cities, 
energetic  people  pursuing  many  different  paths  which  cross  and 
recross  one  another  in  an  infinite  variety  of  ways.  Such  a  country 
cannot  be  placed  under  the  yoke  of  a  simple  formula  such  as 
would  conceivably  be  possible  if  the  entire  continent  were  to  be 
emptied  of  its  houses  and  their  occupants  and  the  entire  history 
of  this  nation  reconstructed  by  settling  the  continent  anew  under 
the  guidance  of  such  a  simple  rule,  and  in  those  parts  of  the 
continent  where  the  railroad  under  such  a  rule  would  permit  them 
to  go.  Our  cities  are  where  they  are.  It  is  an  inhuman  policy 
that  would  through  the  agency  of  transportation  wipe  some  of 
them  out  as  completely  as  if  an  earthquake  were  to  swallow  them. 
Our  railroads  are  where  they  are.  Excepting  those,  few  in 
number,  that  ought  possibly  to  be  scrapped,  operating  arrange- 
ments and  rates  should  be  such  that  they  can  continue  to  serve 
their  respective  communities  with  increasing  efficiency. 

We  have  not  asked  to  be  relieved  of  so-called  "prosecutor" 
functions  of  the  Commission.  We  have  been  criticised  with  great 
persistence  for  performing  the  functions  both  of  the  prosecutor 
and  the  judge.  This  is  a  purely  captious  and  theoretical  criticism. 
Any  one  at  all  familiar  with  the  conduct  of  our  work  will  realize 
how  impossible  it  is  as  a  practical  matter  to  have  these  so-called 
prosecuting  functions  influence  the  members  of  the  Commission 
in  arriving  at  a  judgment  in  rate  questions.  The  records  of  the 
courts  will  show  that  not  only  have  railroad  officials  and  em- 
ployees been  indicted,  fined  and  imprisoned  as  a  result  of  in- 
vestigations made  by  us,  but  shippers  have  been  indicted,  fined 
and  imprisoned  because  of  matters  brought  to  the  attention  of  the 
respective  courts  by  our  agents  assisting  United  States  attorneys. 
During  certain  periods,  the  number  of  shippers  thus  punished  has 
been  greater  than  the  number  of  railroad  officials  similarly  pun- 
ished, yet  I  have  never  heard  any  one  complain  that  the  Com- 
mission could  not  be  fair  to  shippers  because  it  is  instrumental 
in  prosecuting  shippers  for  defrauding  the  railroads.  If  Con- 
gress should  deem  it  wise  to  take  from  us  these  alleged  prosecut- 

[553] 


42  RAILROAD  LEGISLATION  [Vol.  VIII 

ing  functions  and  place  them  elsewhere,  well  and  good;  but  such 
a  transfer  of  function  can  have  no  possible  effect  on  the  per- 
formance of  our  official  duties  especially  in  rate  matters. 

One  of  the  most  important  subjects  regarding  which  we  have 
recently  made  recommendations,  following  similar  recommenda- 
tions for  many  years  before,  is  the  regulation  of  the  issuance  of 
securities.  A  temporary  commission,  known  as  the  Railroad 
Securities  Commission,  made  a  report  upon  this  subject  in  1911. 
That  report  proposed  a  plan  of  regulation  which  centered  about 
effective  publicity  based  upon  active  administrative  supervision. 
I  was  a  member  of  the  Securities  Commission  and  joined  in  its 
report  and  recommendations.  Our  recommendations  to  Congress 
differ  from  those  made  by  the  Securities  Commission,  and  it  is 
pertinent  to  ask  how  I  can  consistently  join  my  associates  in  the 
present  program.  The  answer  is  simple.  The  conditions  of  time, 
place  and  circumstance,  to  repeat  an  expression  used  earlier  in 
this  paper,  were  different  in  1911  from  what  they  are  in  1919. 
One  of  the  main  reasons  for  opposing  in  1911  the  kind  of  ad- 
ministrative control  of  the  issuance  of  securities  which  we  now 
advocate  was  the  lack  of  proper  information  as  a  basis  for  action. 
The  field  work  of  inventorying  the  properties  of  carriers  and  of 
compiling  their  financial  histories  and  accounts  has  been  prac- 
tically completed.  Although  much  remains  to  be  done  in  valua- 
tion, what  has  already  been  done  alone  justifies  a  different  legis- 
lative program  respecting  the  issuance  of  securities  to-day  from 
what  would  have  been  wise  ten  years  ago,  I  am,  therefore,  heart- 
ily in  favor  of  this  feature  of  our  program  even  though  it  differs 
from  that  which  I  favored  nearly  ten  years  ago. 

If  there  are  any  who  have  doubts  regarding  the  necessity  for 
regulating  securities  I  call  their  attention  to  a  single  feature 
showing  that  not  everything  which  has  been  undesirable  in  con- 
nection with  securities  has-been  discontinued.  About  ten  years 
ago  a  certain  important  railroad  was  planning  extensive  new 
construction  and  the  acquisition  and  reconstruction  of  other 
properties.  These  plans  have  more  recently  been  completed. 
In  that  connection  the  general  counsel  of  the  carrier  in  question 
addressed  its  president  in  a  long  and  carefully  framed  letter 
from  which  I  quote  only  a  few  sentences : 

The  amount  of  consideration  to  be  paid  for  these  lands  is  in  our 
hands  to  fix  within  reasonable  limits.  *  *  *  Of  course,  the  value  of 
the  stock  and  bonds  in  this  connection  means  market  value,  but  because 
our  companies  will  own  the  stock,  at  least,  if  not  the  bonds,  the  par 

[5S4] 


No.  4]  THE  LEGISLATIVE  PROGRAM  43 

value  is  very  apt  to  be  taken  as  the  actual  market  value.  *  *  *  A 
full  capitalization  of  the  entire  legitimate  cost  of  the  road  is  to  some 
extent  a  protection  to  our  large  earnings.  *  *  *  Therefore,  the  cap- 
italization should  be  fixed  at  a  sum  large  enough  to  eat  up  in  interest  and 
dividends,  at  a  reasonable  rate  of  interest  and  dividends,  the  probable 
earnings  of  the  company.     *     *    * 

The  regulation  of  the  issuance  of  securities  is  in  itself  a  large 
and  important  task.  It  has,  therefore,  been  proposed  to  increase 
the  present  membership  of  the  Commission  by  two.  This  leads 
me  to  make  a  few  observations  regarding  the  size  of  the  Com- 
mission. In  1917  the  membership  was  increased  from  7  to  9. 
The  same  act  which  increased  our  numbers  also  provided  for 
power  to  act  through  subdivisions.  We  organized  three  sub- 
divisions composed  of  three  members  each  and  designated  as 
Division  1,  Division  2  and  Division  3,  respectively.  More  re- 
cently we  organized  one  additional  division  known  as  Division  4, 
composed  of  five  members,  made  up  of  members  who  also  serve 
on  other  Divisions.  The  less  important  cases  are  heard  and  dis- 
posed of  by  Divisions  of  the  Commission,  whereas  formerly  the 
entire  Commission  was  required  to  sit  in  argument  and  in  con- 
ference on  all  cases.  Many  of  the  important  cases  and  all  appli- 
cations for  and  proceedings  upon  rehearing  are  still  being  heard 
by  the  full  Commission.  Only  these  cases,  together  with  all 
important  questions  not  directly  connected  with  cases  which  come 
before  the  Commission,  are  given  consideration  in  conference 
of  the  full  Commission.  This  has  afforded  us  substantial  relief. 
While  every  month  there  are  cases  to  be  heard  by  the  entire 
Commission,  ten  for  instance,  during  the  present  month,  there 
are  many  days  on  which  only  three  members  of  the  Commission 
are  required  to  sit,  leaving  the  other  members  free  for  other 
duties.  During  the  vear  immediately  preceding  the  creation  of 
subdivisions,  we  sat  in  conference  and  argument  for  about  220 
days.  Subdivision  has  facilitated  the  conduct  of  all  business 
which  can  be  disposed  of  by  a  Division.  On  the  other  hand,  the 
increase  in  numbers  from  7  to  9  has  retarded  the  conduct  of 
some  business  which  requires  the  consideration  of  the  full  Com- 
mission. An  exchange  of  views  among  9  men  and  arriving  at  a 
decision  takes  more  time  than  in  the  case  of  7  men.  It  is  now 
proposed  to  add  two  additional  members.  This  further  enlarge- 
ment is  necessary  because  undoubtedly  a  new  subdivision  must 
be  created  to  deal  with  the  question  of  securities,  although  funda- 
mental matters  will  doubtless  receive  the  consideration  of  the 
entire  enlarged  Commission,  at  least  during  the  formative  period. 

[555] 


44  RAILROAD  LEGISLATION  [Vol.  VIII 

Suggestions  have  been  made  for  a  commission  of  from  15  to 
25  or  30  members.  Such  a  commission  is  an  impossibility.  It 
could  not  be  a  commission  in  the  sense  in  which  a  body  of  five  or 
seven  men  is  a  commission.  It  would  be  a  convention  of  men. 
Three  men  are  sufficient  to  dispose  of  the  less  important  matters 
and  matters  which  merely  follow  previous  decisions  of  a  larger 
body.  Five  men  generally  afford  all  the  points  of  view  and  de- 
liberative judgment  which  important  questions  require.  Seven 
men  certainly  furnish  it ;  and  seven  is  to  my  mind  the  maximum 
number  of  commissioners  who,  acting  as  a  whole,  can  constitute 
an  efficient  administrative  and  regulatory  body.  One  of  the 
problems  of  the  future  relating  to  our  internal  organization  there- 
fore is  the  problem  of  reducing  the  number  of  things  which  the 
entire  Commission  of  11  or  more  members  must  consider  sitting 
as  a  body,  and  increasing  the  volume  of  business  which  may  be 
handled  by  a  subdivision. 

I  cannot  refrain  from  referring  to  one  element  of  regulation 
as  it  unfolds  -itself  in  the  future,  which  is  entirely  new.  Two 
years  of  Federal  control  have  initiated  into  the  public  service  a 
great  body  of  men  who  theretofore  had  been  accustomed  to  take 
only  the  point  of  view  of  private  officials  of  private  companies. 
With  their  peculiar  experiences  and  traditions  behind  them,  these 
men  assumed  the  duties  and  responsibilities  of  public  officials 
with  the  advent  of  Federal  control.  They  have  been  compelled 
to  consider  not  only  the  private  company  standpoint  but  also 
the  public  point  of  view.  They  have  been  obliged  to  act  as  judges 
between  conflicting  public  and  private  interests.  They  have  come 
to  appreciate  the  position  of  a  disinterested  party  in  controversies 
affecting  such  conflicting  interests.  When  these  men  return  to 
private  employment  with  their  respective  companies  they  will 
be  different  men  from  what  they  were  before  Federal  control. 
Their  recent  experiences  and  observations  should  make  them 
much  more  efficient  in  handling  the  public  aspect  of  their  com- 
panies' business  and  without  sacrificing  legitimate  private  in- 
terests they  will  contribute  a  point  of  view  and  lend  a  support  to 
the  work  of  the  Interstate  Commerce  Commission  which  would 
have  been  impossible  otherwise. 

Finally  I  cannot  refrain  from  interjecting  a  thought  which 
although  somewhat  foreign  to  the  title  of  this  discussion,  is 
nevertheless  most  intimately  connected  with  the  institution  with 
which  we  are  dealing.     I  have  previously  indicated  that  our 

[SS6] 


No.  4]  THE  LEGISLATIVE  PROGRAM  45 

program  is  bottomed  upon  the  past;  that  it  represents  growth; 
and  that  in  a  word  it  is  evolutionary  and  not  revolutionary.  Up 
to  very  recent  times  the  word  revolution  has  been  a  part  of  the 
vocabulary  of  American  citizens  only  in  describing  events  of 
1776  and  what  is  associated  with  that  date.  Unfortunately  this 
word  has  now  obtruded  itself  upon  us,  not  with  the  thrilling 
thoughts  and  visions  of  1776,  but  we  have  been  compelled  to  asso- 
ciate it  with  sinister  things  that  threaten  to  undo  much  of  what 
was  accomplished  in  1776.  It  is  impossible  to  discuss  at  this 
time  what  these  words  suggest.  As  a  citizen,  however,  I  wish 
to  be  permitted  to  express  the  view  that  while  there  are  many 
things  that  should  be  changed,  while  there  are  many  wrongs  to 
be  righted,  any  man  who  in  these  United  States  of  America  to- 
day talks  or  thinks  revolution  is  a  traitor  to  our  country  and  an 
enemy  of  mankind. 

[SS7] 


THE  RELATIONS  OF  SHIPPER  AND  CARRIER 

FRANK  HAIGH  DIXON 
Professor  of  Railway  Economics,  Princeton  University 

THE  problem  of  railroad  regulation  and  rehabilitation  pos- 
sesses this  characteristic — not  unusual  in  problems  of  an 
economic  character — that  from  whatever  angle  one  ap- 
proaches it,  one  is  drawn  inevitably  into  the  discussion  of  its 
every  phase.  So  closely  associated  and  interdependent  are  all 
the  interests  involved  that  it  is  almost  impossible  to  consider  one 
phase  without  taking  into  account  all  the  others.  The  railroad 
problem  from  the  standpoint  of  the  shipper  is  in  the  last  analysis, 
the  same  problem  from  the  standpoint  of  the  public,  and  hence 
what  I  shall  say  this  morning  may  appear  to  wander  somewhat 
widely  from  the  specific  topic  set  for  discussion.  I  take  it  that 
the  general  topic  has  in  mind  problems  of  service  and  of  rates 
as  applied  to  the  mass  of  commodities  transported  for  the  public. 
It  is  the  problem  of  freight  service.  What  I  propose  to  do  as 
an  opening  for  the  morning's  discussion  is  to  state  what  in  my 
judgment  are  the  outstanding  considerations  in  the  relation  of 
the  shipping  public  to  the  transportation  agencies. 

In  any  attempt  to  solve  the  present  railroad  problem,  we  shall 
have  to  take  account,  among  other  factors,  of  two  more  or  less 
conflicting  interests  that  must  be  protected  and  harmonized, — 
private  capital  that  owns  the  machine  and  is  assuming  responsi- 
bility for  its  operation,  and  the  shippers  who  are  using  this 
machine  for  the  transportation  of  their  freight.  What  may 
each  require  of  the  other?  I  am  assuming  that  one  of  these  two 
interests  will  be  the  private  railroad  corporations  rather  than  the 
government,  because  I  have  been  able  to  discover  little  evidence 
of  a  desire  in  this  country  at  present  for  railroad  nationalization. 
Notwithstanding  the  very  evident  growth  of  liberalism  and  even 
of  radicalism  in  this  country,  the  activity  of  socialistic  writers  and 
speakers,  the  intensive  campaign  of  the  railroad  brotherhoods, 
there  is  scarcely  a  remote  possibility  that  Congress,  representing 
the  people,  will  give  a  moment's  serious  consideration  at  the 
present  time  to  government  ownership  and  operation.  The  ques- 
tion of  government  versus  private  ownership  and  operation  is 

[5S8] 


No.  4]  THE  RELATIONS  OF  SHIPPER  AND  CARRIER  47 

not  one  of  principle,  but  one  of  expediency  merely.  The  public 
should  entrust  the  performance  of  its  transportation  service  to 
that  agency,  whether  public  or  private,  that  will  best  perform 
it.  And  it  is  because  so  large  a  proportion  of  the  public  to-day 
believes  that  private  capital  can  give  this  service  more  efficiently 
than  can  the  government,  that  the  agitation  for  government  own- 
ership has  made  so  little  headway.  I  think  we  may  safely  pro- 
ceed in  our  discussion  upon  the  assumption  that  private  capital 
is  to  be  given  another  opportunity  to  show  what  it  can  do  to  fur- 
nish this  country  with  efficient  transportation. 

Looking  at  the  question,  then,  first  from  the  standpoint  of  the 
shipper,  what  may  he  reasonably  require  of  the  railroad  trans- 
portation system, — not  of  an  individual  railroad  company,  for 
that  is  not  my  point  of  view,  but  of  the  aggregate  of  railroad 
corporations  that  stand  prepared  to  handle  his  freight  ?  What  the 
shipper  requires  may  all  be  summed  up  in  the  one  word  service. 
Frequently  this  demand  is  embodied  in  the  words,  efficient  service 
at  reasonable  rates,  but  I  have  intentionally  omitted  this  latter 
requirement  because  I  question  whether  by  and  large  the  shippers 
are  seriously  concerned  as  to  whether  the  rate  structure  as  a 
whole  is  high  or  low.  There  was  a  time  earlier  in  our  history 
when  our  transportation  facilities  were  not  as  generous  or  as 
flexible  as  they  are  now,  and  when  discriminations  between  large 
and  small  shippers  were  more  common.  In  those  days,  the  ship- 
per felt  more  directly  the  burden  of  the  rate,  and  found  it  more 
difficult,  if  not  altogether  impossible,  to  shift  it  to  other  shoulders. 
To-day  I  venture  the  generalization  that  in  the  large  proportion 
of  instances,  the  burden  of  the  rate  is  passed  on  to  the  consumer, 
and  disappears  in  price,  where  it  is  lost  from  view  forever. 
What  we  are  more  apt  to  hear  to-day,  especially  from  organized 
bodies  of  shippers,  is  the  argument  for  adequate  rates.  This  de- 
mand, which  has  become  more  articulate  during  the  last  few 
years,  is  based  partly  upon  a  realization  by  the  shippers  that  this 
is  the  only  way  to  get  the  service  they  require,  and  partly  upon 
a  consciousness  that  this  adequacy,  when  obtained,  will  not  seri- 
ously deplete  their  own  pocket-books.  Where  the  shippers' 
interest  in  rates  does  appear  is  in  such  matters  as  the  equaliza- 
tion of  burden  upon  different  commodities,  and  the  equalization 
of  market  opportunities  for  different  producing  sections  and 
manufacturing  centers, — in  other  words,  in  the  relativity  of  rates. 

If  service  is  the  one  thing  the  shipper  requires,  let  us  attempt 

[559] 


48  RAILROAD  LEGISLATION  [Vol.  VIII 

to  analyze  it  into  its  most  important  elements.  The  first  and 
immediate  need,  which  in  a  way  comprehends  all  the  others,  is 
for  a  greater  unification  of  the  facilities  of  transportation  on  the 
one  hand,  and  on  the  other  hand,  a  greater  unity  in  the  agencies 
that  regulate  the  operation  of  these  facilities  and  the  charges  im- 
posed. Such  unification  is  necessary  in  order  that  the  rate  struc- 
ture may  be  simplified  and  standardized,  and  the  inequalities  and 
the  injustices  eliminated,  that  spring  from  the  mass  of  tariffs 
filed  by  hundreds  of  railroad  corporations  and  passed  upon  by 
over  two  score  of  regulating  commissions.  That  great  progress 
has  been  made  toward  fairer  relations,  no  one  can  deny  who  has 
followed  the  history  of  regulation  in  this  country  for  the  past 
two  decades,  but  the  problem  is  far  from  having  reached  the 
stage  of  complete  solution.  The  conflict  of  state  and  federal 
jurisdiction  in  the  matter  of  rates  is  a  serious  hindrance  to  the 
accomplishment  of  the  desired  end.  My  own  feeling  is  that 
exclusive  jurisdiction  in  rate  matters  should  be  entrusted  to  the 
federal  commission.  We  have  had  sufficient  illustration  of  the 
ability  of  the  state  commissions,  when  they  wish,  to  throw  an  in- 
terstate schedule  completely  out  of  line.  Such  action  on  their 
part  may  be  of  immediate  advantage  to  a  local  industry  or  two, 
but  for  the  body  of  shippers  of  the  country  as  a  whole,  such  a 
policy  is  unfair  and  burdensome.  Leaving  the  regulation  of 
intra-state  rates  exclusively  to  state  commissions  does  not  solve 
the  problem  for  there  are  few  such  rates  that  do  not  in  these  days 
have  their  interstate  implications.  Conferences  between  state  and 
federal  commissions  may  act  as  a  palliative,  but  such  conferences 
are  not  likely  to  take  place  until  the  trouble  has  reached  an  acute 
stage.  Efficiency  in  service  demands  a  smooth  running  machine 
all  the  time,  and  this  can  only  be  attained  through  unified  regula- 
tion in  the  hands  of  a  central  body. 

Equitableness  in  rates  requires  again  that  not  only  shall  regu- 
lation be  centralized,  but  that  the  units  of  transportation  shall  be 
reduced  in  number,  and  thrown  into  larger  systems.  How  many 
systems  there  shall  be  or  of  what  their  constituent  elements  shall 
consist,  I  do  not  here  undertake  to  say,  but  would  merely  express 
the  view  that  they  should  follow  well-established  lines  of  traffic 
and  should  be  guided  in  their  construction  by  commercial  rather 
than  geographical  considerations.  A  regional  grouping  would 
have  no  economic  justification.  I  do  not  care  to  enter  here  into 
the  legal  difficulties  associated  with  the  actual  processes  of  con- 

[560] 


No.  4]  THE  RELATIONS  OF  SHIPPER  AND  CARRIER  49 

solidation,  nor  to  discuss  the  relative  desirability  of  voluntary  and 
compulsory  consolidation,  beyond  venturing  the  opinion  that  vol- 
untary consolidation  would  not  succeed,  and  that  sooner  or  later 
compulsion  would  have  to  be  resorted  to  if  the  end  were  to  be 
attained.  Such  consolidations  along  commercial  lines  would 
result  in  eliminating  as  independent  factors  the  so-called  weak 
roads,  by  absorbing  them  into  systems  with  their  more  prosperous 
competitors.  There  would  thus  be  removed  much  of  the  economic 
waste  of  roundabout  hauls,  much  of  the  instability  in  rate  struc- 
tures, much  of  the  inequality  in  transportation  charges  as  between 
different  commodities  and  different  lengths  of  haul.  The  prin- 
ciple of  rate-making  which  declares  that  in  an  industry  with  a 
large  fixed  plant  any  earnings  on  traffic  over  and  above  the  out- 
of-pocket  expenses  of  the  haul  justify  the  rate,  is  sound  if  prop- 
erly applied,  but  it  has  been  carried  so  far  in  many  instances 
that  it  has  resulted  in  enormous  waste,  and  the  American  public 
has  paid  in  transportation  charges  for  millions  of  miles  of  un- 
necessary and  unjustifiable  haulage.  The  shipping  public  has 
a  right  to  demand  that  so  far  as  it  is  humanly  possible,  this 
wastage  should  cease,  and  there  is  no  better  time  to  take  the  evil 
vigorously  in  hand  than  now,  when  the  whole  transportation 
problem  is  being  studied  with  an  earnestness  and  a  sincerity 
never  before  displayed  in  our  history.  Consolidation  should  be 
effected  in  such  manner  as  to  create  large  systems  covering  well- 
defined  traffic  routes,  and  designed  to  handle  the  business  of  the 
country  in  the  most  direct  manner,  unobstructed  by  the  selfish 
requirements  of  any  individual  railroad  system.  I  do  not  per- 
sonally think  that  competition  should  be  eliminated.  There  may 
come  a  time  when  such  competition  will  no  longer  be  of  impor- 
tance; but  with  adequate  oversight  to  prevent  misuse  of  the 
competitive  privilege,  I  see  no  reason  why  we  cannot  anticipate 
that  competition  between  these  consolidated  systems  will  work  to 
raise  steadily  the  standard  of  service  offered  and  thus  accrue  to 
the  advantage  of  the  public  at  large.  The  oversight  to  which  I 
refer  would  consist  in  giving  to  the  Federal  Commission  powers 
sufficient  in  addition  to  what  it  now  possesses  over  rates  and 
service,  to  ensure  the  most  complete  and  most  economical  utiliza- 
tion possible  of  road,  equipment  and  terminals  without  regard  to 
private  corporate  ownership.  Whatever  has  been  accomplished 
during  the  period  of  unified  government  operation  in  the  direction 
of  joint  use  of  terminals,  direct  routing,  elimination  of  unneces- 

[S61] 


SO  RAILROAD  LEGISLATION  [Vol.  VIII 

sary  switching,  and  the  like  should  constitute  a  starting-point 
for  a  program  of  extensive  amelioration.  The  very  serious  physi- 
cal problem  of  joint  terminals  in  the  populous  centers  of  the 
country  should  be  tackled  with  the  aid  of  the  best  engineering 
talent,  and  the  pressure  of  public  opinion  should  be  brought  to 
bear  upon  municipalities  where  such  terminal  problems  exist, 
to  seek  an  early  solution.  For  the  problem  is  in  no  sense  a  local 
one.  The  situation  in  St.  Louis  or  Chicago  or  Kansas  City  is  a 
vital  one  for  every  shipper  and  every  consumer  in  the  country. 

Among  the  added  powers  that  should  be  conferred  upon  the 
Federal  Commission  is  the  power  to  prescribe  minimum  rates. 
It  is  vital  to  the  solution  of  the  entire  problem  of  relativity  that 
a  railroad  corporation  should  be  prevented  from  demoralizing 
the  rate  structure  by  a  policy  of  rate  reductions,  which  while 
temporarily  bolstering  up  its  own  earnings  and  benefiting  its 
local  shippers,  is  causing  the  country  at  large  an  economic  loss  by 
throwing  the  burden  on  other  traffic  and  by  depriving  routes 
better  located  of  the  opportunity  of  handling  the  business.  Ship- 
pers have  come  to  realize,  if  the  general  public  has  not,  that 
specific  rates  may  be  too  low  as  well  as  too  high. 

But  more  than  this,  in  order  that  the  shippers  and  the  public 
may  realize  to  the  full  the  benefits  of  an  adequate  system  of 
transportation,  shippers  should  demand  that  greater  utilization 
be  made  of  our  agencies  of  transportation  other  than  rail, — 
particularly  the  facilities  offered  by  our  natural  waterways. 
For  the  realization  of  this  end,  it  is  necessary  that  there  be 
constructed  such  connections  between  water  and  rail  systems  and 
such  facilities  of  transfer,  as  will  remove  existing  obstructions. 
This  policy  should  be  urged  wherever  water  carriage  is  economi- 
cally justifiable.  The  public  should  not  allow  its  waterways  to 
remain  idle  unless  it  has  satisfied  itself  by  expert  investigation 
that  its  best  interests  require  an  abandonment  of  water  trans- 
portation and  a  concentration  upon  rail.  Certainly  it  should  not 
sit  idly  by  and  lose  the  use  of  its  waterways  merely  because  the 
physical  connections  with  rail  have  not  been  perfected. 

Turning  to  the  other  side  of  the  question,  what  have  the  rail- 
road corporations  in  their  turn  a  right  to  require  of  the  public? 
This  can  be  stated  in  a  sentence,  although  it  would  require  far 
more  time  than  I  have  at  my  disposal  to  discuss  the  statement 
in  all  its  implications.  Private  capital  invested  in  railroads  has  a 
right  to  require  a  return  on  its  investment  in  the  property  devoted 

[562] 


No.  4]  THE  RELATIONS  OF  SHIPPER  AND  CARRIER  51 

to  the  public  service  that  shall  be  sufficient  (1)  to  cover  costs  of 
operation  efficiently  expended,  together  with  taxes  and  other 
public  obligations;  (2)  to  cover  the  interest  on  obligations  the 
proceeds  of  which  have  actually  been  invested  in  the  property; 
(3)  to  cover  a  dividend  upon  an  honest  stock  capitalization  at  a 
rate  high  enough  to  ensure  that  the  capital  needed  for  develop- 
ment can  be  obtained,  which  means  not  alone  enough  to  pay  the 
dividend  in  any  one  year,  but  in  addition  the  accumulation  of  suf- 
ficient reserve  to  satisfy  the  public  that  its  dividends  will  be 
continuous;  and  (4)  to  accumulate  a  surplus  sufficient  to  keep 
its  property  up  to  the  standard  of  service  demanded  by  the  public, 
such  surplus  to  remain  uncapitalized. 

Of  course  this  statement  opens  up  a  wide  field  of  controversy, 
involving  questions  as  to  the  validity  of  the  railroads'  property 
accounts,  the  status  of  federal  valuation  and  its  usefulness  when 
completed,  the  fundamental  question  as  to  what  constitutes  the 
value  upon  which  the  railroads  are  entitled  to  earn,  the  extent 
of  existing  capitalization,  and  the  like.  We  can  only  hope  that 
out  of  the  arguments  and  disagreements  of  the  experts,  and  the 
decisions  of  commissions  and  courts,  some  agreement  may  eventu- 
ally emerge  on  fundamental  conceptions  of  value  and  capitaliza- 
tion and  rate  of  return  that  will  supplant  our  present  haphazard 
methods  of  rate  determination.  I  cannot  discuss  these  questions 
here,  but  can  only  say  that  there  seems  to  me  to  be  no  insuperable 
obstacle  to  reaching  a  reasonable  degree  of  approximation  as  to 
the  value  of  the  property  upon  which  the  railroads  are  entitled 
to  earn,  a  value  that  can  be  adjusted  and  modified  later  in  the 
light  of  more  complete  data  and  more  thoroughly  established 
principles.  We  must  make  a  start  sometime;  most  of  our  diffi- 
culties are  due  to  the  fact  that  we  have  dallied  so  long. 

With  the  purpose  of  restoring  railroad  credit  and  of  insuring 
to  railroads  an  adequate  return  upon  their  investment,  two  pro- 
posals have  been  made,  both  of  which  offer  strong  claims  for 
enactment  into  law.  To  insure  an  adequate  return  to  capital  in- 
vested in  the  industry,  it  is  proposed  that  Congress  should  adopt 
a  rule  of  rate-making  as  a  guide  to  the  Interstate  Commerce 
Commission,  the  object  of  which  being  to  make  clear  that  the 
discretion  of  the  Commission  in  making  rates  goes  beyond  a  nar- 
row consideration  of  the  reasonableness  of  the  specific  rates  under 
review,  and  embraces  an  examination  and  consideration  of  the 
general  financial  condition  of  the  carrier,  to  the  end  that  it  may 

[S63] 


52  RAILROAD  LEGISLATION  [Vol.  VIII 

be  assured  earnings  adequate  for  the  service  needed  by  the 
public.  Instead  of  being  confined  to  the  function  of  guardian 
of  the  shipper  against  the  imposition  of  an  unreasonable  rate,  the 
Commission  is  to  become  the  protector  and  promoter  of  trans- 
portation service  as  a  whole.  It  would  clarify  the  powers  of  the 
Commission,  remove  all  doubt  as  to  the  limits  of  its  authority, — 
a  doubt  that  has  revealed  itself  more  than  once  in  divided  coun- 
sels in  the  Commission  itself — and  greatly  strengthen  public  con- 
fidence in  the  determination  of  the  government  to  assure  to  rail- 
roads adequate  earnings. 

The  other  proposal,  which  aims  directly  to  bolster  up  railroad 
credit,  is  that  of  a  government  guarantee  of  a  minimum  return 
upon  railroad  investment.  This  suggestion  has  usually  been  asso- 
ciated with  one  for  the  taking  by  the  government  of  excess  earn- 
ings over  a  certain  maximum,  to  be  used  for  the  benefit  of  the 
transportation  service  as  a  whole.  In  this  form,  the  proposal 
has  met  with  determined  opposition  from  railroad  executives, 
first  on  the  economic  ground  that  all  incentive  to  efficiency  will 
thereby  be  removed,  and  second  on  the  legal  ground  that  such  a 
commandeering  of  earnings  resulting  from  rates  declared  reason- 
able by  the  Commission  would  be  confiscatory  and  unconstitu- 
tional. Time  does  not  permit  me  to  enter  upon  the  discussion 
of  this  question,  which  after  all  is  only  indirectly  related  to  the 
topic  of  this  morning.  My  own  conviction  is  that  a  government 
guarantee  will  be  found  to  be  necessary  if  railroad  credit  is  ever 
to  be  restored  to  a  healthy  status,  and  I  see  no  reason  why  such 
a  guarantee  cannot  be  made  sufficiently  elastic  to  prevent  the 
destruction  of  private  initiative. 

In  conclusion,  I  would  merely  add  that  if  adequate  earnings 
are  assured  to  the  railroad  corporations,  the  public  has  a  right  to 
expect  that  the  transportation  business  of  the  country  will  be  so 
conducted  that  the  public  interest  will  be  the  predominant  in- 
fluence in  the  determination^of  any  question  of  policy,  and  will 
not  be  held  to  be  merely  coequal  with  that  of  the  private  capital 
employed.  We  have  reached  the  point  in  our  political  and  eco- 
nomic development  where  we  are  ready  to  demand  that  a  public 
service  be  operated  exclusively  in  the  interest  of  the  public,  and 
private  capital  must  be  made  to  appreciate  clearly  that  it  is  in- 
vesting in  this  public  business  under  this  restriction.  After  two 
years  of  government  operation,  private  operation  is  again  to  be 

[564] 


No.  4]  THE  RELATIONS  OF  SHIPPER  AND  CARRIER  53 

placed  on  trial.  Nothing  short  of  a  whole-hearted  acceptance  of 
the  principles  of  public  service  and  their  every-day  application 
to  railroad  administration  and  operation  will  save  this  country 
from  the  doubtful  experiment  of  government  ownership. 

[S6S] 


OBJECTS  OF  RAILWAY  LEGISLATION 

FRANK  W.  NOXON 
Secretary  of  Railway  Business  Association 

I  HAD  the  privilege  on  November  17th  in  St.  Louis  at  the 
American  Mining  Congress  of  hearing  an  address  by  the 
Editor  of  the  Railway  Age,  Mr.  Samuel  O.  Dunn,  which 
contained  some  very  extraordinary  and  very  startling  statistics. 
Mr.  Dunn,  covering  the  ten  years  ended  1915,  showed  what  had 
been  the  growth  of  traffic,  what  had  been  the  growth  of  facilities 
for  handling  the  traffic.  He  undertook  to  estimate  how  far  short 
the  provision  of  facilities  had  been  in  comparison  with  the  growth 
of  traffic  during  those  years,  what  had  been  the  growth  of  traffic 
since,  what  might  be  reasonably  expected  to  be  the  growth  of 
traffic  in  the  next  three  or  four  years,  what  it  would  cost  to 
make  up  the  arrearage  of  provision  accumulated  in  the  ten  years 
ended  1915,  and  from  now  on  to  provide  for  facilities  for  new 
growth.  Equating  his  figures  with  some  view,  both  to  the 
changed  purchasing  power  of  the  dollar  and  also  to  the  increased 
use  of  facilities  per  unit,  larger  use  of  cars,  tracks,  etc.,  and 
then,  having  made  his  computations  in  general,  making  a  very 
generous  deduction  for  possible  error,  he  figured  that  in  the  next 
three  years,  at  least  six  billons  of  dollars  of  new  money  must 
be  found  to  make  increase  in  facilities  keep  pace  with  the  probable 
growth  of  traffic.  He  remarked  that  we  are  hearing  on  all  sides 
a  demand  that  production  be  increased.  He  said,  "You  cannot 
increase  production  in  the  United  States,  if  you  do  not  provide 
transportation  facilities  on  an  enormous  scale  with  which  to  do 
that  business." 

He  told  the  story  about  a  man  who  had  listened  to  these  figures. 
The  man  said,  "We  will  do  this  business  by  auto  truck."  Mr. 
Dunn  said,  "How  will  your  manufacturers  of  auto  trucks  get 
their  materials?  How  will  you  build  the  pikes  on  which  the 
trucks  are  to  run,  if  the  railroads  cannot  carry  the  cement?" 

We  have  had  at  this  meeting  two  papers,  coming  from  two 
distinctly  different  sources.  First  we  had  the  voice  of  the  econo- 
mist, coming  out  of  the  still  air  of  delightful  studies,  and,  from 
his  detached  point  of  view,  giving  you  his  impressions  of  the 

[566] 


No.  4]  OBJECTS  OF  RAILWAY  LEGISLATION  55 

panorama.  Dr.  Dixon,  I  think  I  may  say  by  way  of  condensa- 
tion, let  you  see  that  somebody — he  said  the  railways — must  have 
"one  more  chance."  One  more  chance  to  do  what?  I  think  he 
left  no  question  in  your  minds  that  he  meant  one  more  chance 
to  serve  the  public  adequately. 

Whether  this  one  more  chance  is  to  be  one  more  chance  for 
the  regulators  or  one  more  chance  for  the  railways,  or  for  both, 
we  may  set  aside  for  a  moment,  and  compare  that  background 
from  which  Dr.  Dixon  speaks  and  from  which  his  recommenda- 
tions proceed,  with  the  recommendations  in  the  paper  from 
Interstate  Commerce  Commissioner  Meyer.  I  wonder  if  there 
was  any  one  in  the  room  who  at  any  point  in  that  discussion, 
admirable  and  competent  as  it  was,  could  detect  the  slightest 
anxiety  concerning  whether  facilities  were  to  be  adequate  in  the 
future.  You  noticed  that,  in  the  enumerated  list  of  recommen- 
dations made  by  the  Commission,  there  was  something  about 
adequacy  of  facilities;  you  heard  no  statement  to  the  effect  that 
facilities  had  been  inadequate  and,  least  of  all,  did  you  hear  any 
acknowledgment  that  one  factor  in  a  restoration  of  railway  de- 
velopment must  be  the  government  and  its  policy. 

We  have  before  us  first  a  bill  which  was  passed  by  the  House 
of  Representatives  on  November  17th  and  now  goes  into  the  hop- 
per for  conference.  We  have,  second,  a  bill  introduced  on  the 
23rd  of  October  by  the  full  Senate  Committee,  which  presumably 
will  be  in  due  course  passed  by  the  Senate  and,  in  turn,  join  the 
House  bill  also  in  the  hopper  of  conference.  Do  those  bills  have 
as  their  background  an  acknowledgment  that  provision  of  facili- 
ties in  the  past  few  years  has  been  inadequate;  that  the  main 
purpose  now  of  legislation  must  be  a  resumption  of  railway  de- 
velopment through  a  rehabilitation  of  railway  credit,  and  that 
the  government  has  a  function  in  that  matter?  Are  you  pre- 
pared to  approach  the  consideration  of  those  measures  from  that 
point  of  view  and  test  them  by  that  yardstick  ?  Do  they  do  it  or 
do  they  not? 

The  other  night  in  the  new  Willard  Hotel,  returning  from  my 
day's  labor  at  about  11:30  p.  m.,  I  found  two  friends  of  mine 
seated  at  a  table  in  the  dining  room  engaged  in  very  violent  dis- 
cussion. I  said,  "What  are  you  talking  about?"  They  said, 
"We  are  talking  about  the  railroad  question."  I  said,  "What 
phase  of  it?"  One  of  them  said,  "This  man  says  there  are  thirty- 
seven  plans,  and  I  say  there  are  only  thirty-six." 

[567] 


56  RAILROAD  LEGISLATION  [Vol.  VIII 

I  happen  to  be  the  servant  of  an  association-  which  gives  its 
entire  time  to  this  matter  and  which  hasn't  any  plan ;  one,  I  think, 
of  the  very  few  associations  which  have  no  plan.  I  think  even 
the  indefatigable  Mr.  Waterman  in  his  chart  has  been  unable  to 
detect  that  the  Railway  Business  Association  has  a  plan. 

There  is  something  more  important  than  that,  and  it  is  that  we 
have  reached  the  stage  now  when  numbers  of  associations  and 
individuals  who  have  felt  inclined  to  support  one  or  another  of 
the  plans  or  of  the  leading  provisions  in  those  plans,  have  come 
to  see  that  the  function  now  is  to  drop  plans  and  try  to  see 
whether  we  cannot  be  sure  that  Congress  in  one  way  or  another 
accomplishes  the  purpose  that  underlies  some  of  the  plans. 

What  does  this  House  bill  mean  to  do  ?  A  court,  in  considering 
what  was  intended  to  be  done  by  a  legislature,  will  always  give 
very  great  weight  to  a  provision  introduced  but  rejected.  If  a 
legislative  body  refused  to  do  a  thing  which  was  asked  of  it,  the 
court  will  usually  hold  that  the  legislature  did  not  mean  to  do  that 
thing  at  least. 

I  ask  you  to  hear  two  sentences  which  were  contained  in  the 
bill  as  it  came  from  the  House  Committee : 

The  Commission  shall  be  charged  with  the  duty  and  the  responsibility  of 
observing  and  keeping  informed  as  to  the  transportation  needs  and  the  trans- 
portation facilities  and  service  of  the  country  and  as  to  the  operating  revenues 
necessary  to  the  adequacy  and  efficiency  of  such  transportation  facilities  and 
service.  In  reaching  its  conclusions  as  to  justness  and  reasonableness  of  any 
rate,  fare,  charge,  classification,  regulation,  or  practice,  the  Commission  shall 
take  into  consideration  the  interests  of  the  public,  the  shippers,  the  reasonable 
cost  of  maintenance  and  operation,  including  the  wages  of  labor,  materials, 
and  taxes,  and  a  fair  return  upon  the  value  of  the  property  used  or  held  for 
the  service  of  transportation. 

The  House  cut  those  two  sentences  out.  I  have  studied  this 
bill  from  beginning  to  end.  I  can  find  no  other  place  where  the 
idea  involved  in  those  two  sentences  stands.  The  House  of 
Representatives  goes  to  conference  without  having  said  those 
things.  v 

Your  court  also  would  consider  debate ;  it  would  consider  quo- 
tations from  reports,  in  determining  whether  it  was  the  purpose 
of  the  legislature  to  do  a  certain  thing.  Accompanying  the  report 
with  which  this  bill  was  brought  in,  there  was  a  statement  pre- 
pared by  Interstate  Commerce  Commissioner  McChord,  in  which 
he  said  that  there  was  a  decline  in  railway  credit  but  that  the 
Interstate  Commerce  Commission  was  not  in  any  way  responsible 
for  this,  and  the  general  tenor  of  that  appendix  to  the  Committee 
report  was  that,  whoever  might  be  to  blame,  there  was  no  remiss- 

[S68] 


No.  4]  OBJECTS  OF  RAILWAY  LEGISLATION  57 

ness  on  the  part  of  the  Government  in  its  policy  and  no  need  for 
a  change  of  policy. 

In  going  back  still  farther,  when  Interstate  Commerce  Com- 
missioner Clark,  Chairman  of  the  Legislative  Committee  of  the 
Commission,  appeared  before  the  House  Committee,  he  was 
asked  by  Chairman  Esch  whether  he  would  think  it  advisable 
to  include  in  the  bill  which,  in  its  first  draft  was  written  by  the 
Commission,  that  the  Commission  should  take  into  consideration 
in  the  regulation  of  rates  the  cost  of  capital.  To  which  Repre- 
sentative Clark  replied  he  would  have  no  objection  to  having  that 
go  in,  because  the  Commission  always  had  and  always  would 
consider  the  cost  of  capital,  and  its  course  would  not  be  changed 
in  the  least  if  those  words  went  in. 

We  have  in  the  Senate  bill  two  passages,  both  occurring  on 
page  thirteen  of  the  draft  I  have  in  my  hand.  One  is:  "No 
carrier  subject  to  the  provisions  of  this  act  shall  be  authorized 
to  receive  and  retain  for  the  transportation  services  rendered 
such  proportion  of  the  rates  and  charges  collected  by  it  as  may 
yield  in  the  aggregate  more  than  a  reasonable  return  upon  its 
property  investment,"  a  reasonable  return,  of  course,  being  the 
return  which  the  court  will  compel  a  Commission  to  permit,  a 
return  below  which  a  Commission  is  forbidden  to  depress  rates. 
"In  changing  or  modifying  rates,"  etc.,  "and  in  viewing  them 
from  the  standpoint  of  their  effect  in  producing  revenue,"  etc.,. 
"the  Commission  shall  initiate,  modify  or  adjust  rates,"  etc.,  "as 
nearly  as  may  be  so  that  the  railway  carriers  as  a  whole  allocated 
to  each  district  and  subject  to  this  act  shall  earn  an  aggregate 
annual  net  operating  income  equal  as  nearly  as  may  be  to  five 
and  one-half  per  centum  upon  the  aggregate  value  as  deter- 
mined," etc. 

Here  we  have  a  provision  which  explicitly  recognizes  that  a 
return  must  be  made  upon  the  securities.  It  is  evident  that  the 
purpose  here  is  a  restoration  of  railway  credit.  Unfortunately, 
the  phrase  which  I  quoted  first  from  this  bill  seems  to  negative 
that  and,  from  other  parts  of  the  bill,  there  are  other  confusing 
conflicts  as  I  read  it.  It  may  well  be  that  in  conference  a  clarifi- 
cation of  these  various  provisions  will  result. 

But  what  is  behind  this  Senate  Bill?  What  is  in  the  debate; 
what  is  in  the  report  that  accompanies  the  bill?  What  we  have 
there  is  the  explicit  acknowledgment  by  the  full  Senate  Commit- 
tee that,  to  quote  as  nearly  as  I  can  their  language,  the  regulatory 

[569] 


58  RAILROAD  LEGISLATION  [Vol.  VIII 

system  has  failed  in  the  past,  because  it  has  not  recognized  that 
one  of  the  essential  elements,  one  of  the  essential  aims  of  govern- 
ment regulation  of  rates  is  to  attract  capital. 

Now,  I  wish  to  submit  to  you  in  the  two  or  three  minutes 
which  I  hope  I  still  have,  a  sentence  or  two  which  it  seems  to 
me  Congress  ought  to  embody  in  substance  in  any  legislation  it 
passes. 

To  supplement  the  present  federal  policy  which  by  the  terms  of  the  law  is 
wholly  one  of  restriction,  by  enacting  that  rates  shall  be  such  as  to  yield 
revenue  sufficient  in  the  average  year  to  provide  necessary  expenses  and  the 
credit  basis  so  that  the  average  railway  may  secure  adequate  improvements  and 
extensions. 

Some  of  those  concerned  will  tell  you  the  Commission  will  do 

that  anyway.    Well,  then,  what  harm  is  there  in  saying  that  they 

are  required  to  do  so  in  the  law  ?    You  cannot  regulate  investors. 

The  investor  will  buy  securities  in  accordance  with  his  judgment 

as  to  whether  the  rate  of  return  is  more  attractive  to  him  than 

from  an  investment  he  can  get  somewhere  else.     If  there  is  in 

these  bills  nowhere  that  declaration  of  policy  that  rates  shall  be 

adequate  for  that  purpose,  why  not  say  it? 

To  require  that  the  regulatory  authorities  from  time  to  time  investigate 
and  estimate  for  a  reasonable  period  in  advance  the  transportation  needs  of 
the  country  and  report  to  Congress  or  to  the  public  their  findings  as  to  such 
needs  and  their  estimate  of  the  amount  of  revenue  that  will  in  the  average  year 
assure  approximate  accomplishment  of  such  necessary  development. 

It  is  said  that  the  Commission  considers  this,  that,  and  the 
other.  This  recommendation  is  that  it  shall  not  only  consider  past 
performance,  as  has  been  done  in  connection  with  the  large-scale 
cases  for  the  last  nine  years — statistics  of  the  past,  in  order  to 
determine  what  shall  be  the  revenue  for  the  future;  but,  inas- 
much as  the  individual  companies  must  make  their  budget  not 
for  what  has  passed  over  the  dam,  but  for  the  future,  just  so  the 
Commission  shall  make  a  budget  of  the  aggregate  needs  of  the 
country  in  advance,  and  th^t  it  shall  be  in  form,  that  it  shall  be  a 
tabulation,  that  it  shall  be  made  public,  that  in  a  way  the  Com- 
mission signs  the  pledge  that  it  will  carry  out  these  purposes 
which  we  say  are  necessary  if  the  legislation  is  to  succeed. 

Carrying  that  still  further  in  the  point  of  detail,  to  prescribe  that  in  esti- 
mating the  net  income  required  in  order  to  attract  capital  in  the  amounts 
found  by  the  regulatory  authorities  to  be  necessary,  such  authorities  shall  have 
the  power  and  duty  to  ascertain  and  announce  from  time  to  time  the  rate  of 
return  which,  under  changing  market  money  conditions,  it  is  necessary  to  allow. 

In  other  words,  and  this  is  all  I  have  to  say,  if  you  put  in  that 

bill  a  rate,  whatever  the  rate,  which  is  prescribed  as  the  rate  of 

[570] 


No.  4]  OBJECTS  OF  RAILWAY  LEGISLATION  59 

return  which  is  to  be  permitted,  you  also  say  that  the  Commission 
is  authorized  and  required  to  permit  not  only  that  minimum  rate, 
but  such  additional  rate  as  may  prove  by  experience  and  ascer- 
tainment necessary  in  order  actually  to  attract  capital  for  the 
improvements  and  extensions  which  the  business  of  the  country 
requires. 

[S71] 


THE  SCOPE  AND  FUNCTIONS  OF  A  FEDERAL 
TRANSPORTATION  BOARD 

EMORY  R.  JOHNSON, 

Dean  of  the  Wharton  School  of  Finance  and  Commerce,  University  of 

Pennsylvania 

SO  far  as  I  can  recall  the  suggestion  that  there  should  be  a 
Federal  Transportation  Board  originated  in  a  conversa- 
tion with  Mr.  Harry  A.  Wheeler,  at  that  time — and  it 
was  less  than  a  year  ago — President  of  the  Chamber  of  Com- 
merce of  the  United  States.  I  think  he  said  that  he  had  been 
discussing  this  question  with  certain  gentlemen  in  Chicago  who 
had  been  greatly  impressed  by  the  usefulness  of  the  Federal  Re- 
serve Board  and  felt  that  there  should  be  established  in  the  field 
of  railroad  transportation  a  board  similar  in  character  to  that 
which  had  been  so  successful  in  the  field  of  currency  and  banking. 

There  had  been  before  Congress  and  before  the  country  the 
proposition  made  by  the  railway  executives  that  a  Secretary 
of  Transportation  should  be  provided  for,  with  a  position  in  the 
President's  cabinet,  and  that  this  Secretary  of  Transportation 
should  have  general  charge  of  the  executive  or  administrative 
regulation  of  railroads  and  should,  among  other  things — and 
that  was  particularly  desired  by  the  railway  executives — ascer- 
tain the  financial  needs  of  the  carriers  and  report  those  needs  to 
the  Interstate  Commerce  Commission,  which,  by  statute,  should 
be  required  to  establish  rates  that  would  meet  the  needs  thus 
certified  to  the  commission. 

That  suggestion  of  the  railway  executives  met  with  no  favor 
in  Congress  or  with  the  public,  and  it  had  to  be  abandoned, 
but  at  the  same  time  it  was  very  clear  that  laws  for  the  compre- 
hensive regulation  of  the  railroads  in  the  future  must  be  enacted, 
and  that  that  regulation  would  necessarily  require  for  its  enforce- 
ment the  exercise  of  extended  executive  functions.  The  ques- 
tion then  came  sharply  before  Congress  and  before  the  people, 
who  were  thinking  about  it,  whether  these  new  and  difficult  func- 
tions of  administrative  regulation  of  the  railroads  should  be  en- 
trusted to  the  already  largely  over-worked  Interstate  Commerce 
Commission  or  should  be  entrusted  to  a  new  federal  agency. 

The  bill  that  has  passed  the  House  is  built  upon  the  idea  that  it 

[572] 


No.  4]  THE  SCOPE  AND  FUNCTIONS  61 

is  wiser  to  extend  the  functions  of  the  Interstate  Commerce  Com- 
mission than  to  create  a  new  board.  The  bill  pending  in  the 
Senate,  however,  starts  upon  the  assumption  that  it  is  desirable 
to  provide  for  the  executive  regulation  of  railroads  by  the  estab- 
lishment of  a  Transportation  Board  and  the  whole  bill  is  built 
upon  that  theory. 

What  ought  to  be  done  with  this  phase  of  regulating  the  rail- 
roads? I  think  I  should  stop  just  a  moment  to  say  that  the  suc- 
cess of  the  whole  venture  of  regulation  of  the  railroads  must 
necessarily  hinge  largely  upon  the  machinery  that  is  provided  to 
give  effect  to  the  laws  that  may  be  enacted. 

When  England  began  regulating  railroads  about  the  middle 
of  the  last  century,  dependence  was  placed  upon  the  courts  for 
the  enforcement  of  the  laws.  Shippers  were  expected  to  resort 
to  the  courts  to  secure  their  rights  under  the  statutes.  Regulation 
made  no  headway  in  England,  nor  did  it  in  this  or  other  countries, 
until  machinery  for  the  enforcement  of  the  regulatory  laws  was 
provided.  The  Interstate  Commerce  Commission  was  effective 
in  this  country  for  the  purpose  for  which  it  was  created,  and  any- 
thing that  I  may  have  to  say  in  support  of  a  Federal  Transporta- 
tion Board  is  said  with  no  idea  of  criticizing  the  Interstate  Com- 
merce Commission. 

Whether  there  should  be  a  new  board  or  not  was  considered 
in  a  statement  which  Mr.  Wheeler  made  when  he  presented  to 
the  House  Committee  on  Interstate  and  Foreign  Commerce  a 
program  of  legislation  that  had  been  adopted  by  the  National 
Transportation  Conference.  Mr.  Wheeler  said,  "It  is  believed 
that  the  Interstate  Commerce  Commission  ought  not  to  be  bur- 
dened by  the  addition  to  the  tasks  it  now  performs  of  a  large 
number  of  administrative  duties.  Should  the  commission  as  con- 
templated become  the  authority  for  the  sole  regulation  of  all 
railroad  rates,  rules  and  regulations  affecting  interstate  com- 
merce, its  duties  will  necessarily  be  enlarged.  To  require  the 
commission  to  exercise  the  administrative  functions  contemplated 
in  the  proposed  plan  of  remedial  railroad  legislation,  would  be 
to  the  detriment  of  the  public  interest  because  it  would  seriously 
interfere  with  the  prompt  action  of  the  commission  as  a  body 
for  the  regulation  of  rates,  the  task  for  which  it  was  especially 
created  and  for  the  performance  of  which  it  is  peculiarly 
adapted." 

It  will  be  interesting  to  review  just  by  title  the  additions  to 

[573] 


62  RAILROAD  LEGISLATION  [Vol.  Vm 

the  duties  of  the  Interstate  Commerce  Commission  which  the 
bill  passed  by  the  House  of  Representatives  proposes  to  make 
The  commission,  of  course,  is  to  continue  to  regulate  rates,  not 
only  as  it  has  in  the  past,  but  in  a  larger  way,  because  it  is  to 
determine  rates  on  traffic  within  the  states,  for  the  most  part,  as 
well  as  rates  on  interstate  traffic. 

The  new  duties  which  it  is  proposed  to  give  to  the  commission, 
as  enumerated  -  in  the  House  Bill  and  as  summarized  by  Mr. 
Richard  Waterman  in  a  comparative  statement  he  has  prepared 
for  the  Railroad  Committee  of  the  Chamber  of  Commerce,  are 
as  follows: 

(1)  To  keep  itself  informed  as  to  the  transportation  needs, 
facilities  and  services  of  the  carriers. 

(2)  To  authorize  the  unification,  consolidation  or  merger  of 
two  or  more  carriers  whenever  the  commission  finds  such  con- 
solidations to  be  in  the  public  interest,  and  to  authorize  the  pool- 
ing of  traffic,  earnings  and  facilities. 

(3)  To  exercise  jurisdiction  over  the  use,  control  and  supply, 
as  well  as  the  movement,  distribution  and  interchange  of  loco- 
motives and  cars,  and  also  the  supply,  movement  and  operation 
of  trains. 

(4)  To  prohibit  the  extension  of  present  lines,  or  the  con- 
struction or  acquisition  of  new  lines  by  any  carrier  until  it  has 
obtained  from  the  commission  a  certificate  of  public  necessity  and 
convenience. 

(5)  To  require  the  construction  of  docks  and  rail  connec- 
tions between  rail  and  water  carriers. 

(6)  To  provide,  when  necessary,  for  the  redistribution  of 
traffic  and  for  the  joint  use  of  terminals. 

(7)  To  exercise  exclusive  jurisdiction  over  the  issuance  of 
securities  by  carriers. 

(8)  To  order  a  carries  to  install  automatic  train  stops  or 
train-control  devices. 

(9)  To  exercise  other  important  regulatory  powers  belonging 
to  the  Federal  Government. 

I  submit,  without  argument,  that  that  is  a  rather  large  layout 
of  additional  duties.  The  service  of  about  two  years  which  I 
had  the  privilege  of  performing  on  one  of  the  State  commissions, 
and  the  knowledge  which  I  gained  there  of  the  difficulty  which  a 
State  commission  has  in  keeping  abreast  with  its  work,  convince 
me  that  a  body  of  nine — or  as  it  is  proposed,  eleven  commission- 

[574] 


No.  4]  THE  SCOPE  AND  FUNCTIONS  63 

ers,  constituting  the  Interstate  Commerce  Commission — could 
not  successfully  perform  in  addition  to  the  duties  of  rate  regula- 
tion this  long  list  of  executive  tasks. 

Now  if  a  Transportation  Board  be  created,  what  specific  func- 
tions shall  be  given  it?  I  will  enumerate  them  briefly  without 
much  elaboration. 

First,  the  Board  should  determine  and  announce  the  grouping 
or  consolidation  of  railroads  to  be  in  the  public  interest.  We 
are  going  to  have  in  the  near  future,  I  hope — in  the  distant  future 
certainly — a  greatly  reduced  number  of  railroad  systems.  Con- 
solidation is  to  come  about.  The  House  Bill  provides  for  it  by 
voluntary  action  of  the  carriers.  The  Senate  Bill  provides  for 
it  by  voluntary  action  for  a  period  of  seven  years  and  thereafter, 
if  necessary,  by  the  exercise  of  compulsion  on  the  part  of  the 
Federal  Government.  That  grouping  and  consolidation  of  rail- 
roads with  the  incidental  tasks  it  imposes  will  involve  a  large 
amount  of  work  on  the  part  of  any  regulatory  body. 

Second,  the  Board  should  have  the  authority  to  require,  if  com- 
pulsion is  found  to  be  necessary,  the  railroad  companies,  as  a 
precedent  to  the  formation  of  railroad  consolidations,  to  become 
Federal  corporations  either  by  organization  of  new  companies 
under  Federal  charters  or  by  changing  from  State  to  Federal 
corporations.  A  problem  of  compulsory  incorporation  of  rail- 
roads with  the  shifting  from  State  to  Federal  corporations  is  here 
in  question. 

Third,  the  Transportation  Board  should  be  given  authority  to 
pass  upon  the  public  necessity  for  the  expenditures  of  capital,  in 
excess  of  a  minimum  amount  stipulated  by  statute,  by  all  carriers 
engaged  in  interstate  commerce.  This  power  should  be  so  ex- 
ercised as  to  prevent  unnecessary  duplication  of  line  or  terminal 
railroad  facilities  and  as  gradually  to  bring  about  the  unification 
of  railroad  terminals  and  to  accomplish  that  degree  of  coordina- 
tion of  the  rail,  highway  and  water  transportation  facilities  that 
may  be  found  to  be  in  the  public  interest.  The  unification  of  our 
railroad  transportation  system  in  the  future  can  be  brought 
about,  to  a  large  extent  administratively  by  the  authority  that  con- 
trols expenditures. 

Fourth,  the  Board  should  administer  whatever  general  rail- 
road contingent  fund  the  statute  may  authorize  or  require  the 
carriers  to  accumulate.  The  Senate  Bill,  which  was  influenced 
largely  by  the  program  of  legislation  worked  out  by  the  National 

[575] 


64  RAILROAD  LEGISLATION  [Vol.  VIII 

Transportation  Conference,  provides  for  a  company  reserve 
fund  to  be  built  up  by  each  railroad  company  and  for  a  general 
contingent  fund  to  be  managed  by  the  Transportation  Board  for 
the  purpose  of  developing  railroad  and  other  transportation 
facilities. 

Fifth,  the  Transportation  Board  should  act  as  a  referee  in 
cases  of  disagreement  resulting  in  a  deadlock  of  any  of  the 
boards  which  it-  is  proposed  shall  be  entrusted  with  the  adjust- 
ment of  wages,  hours  of  employment  and  other  conditions  of 
railroad  labor.  The  scheme  of  adjustment  of  wages  and  working 
conditions  by  dual  boards  has  been  explained  by  Mr.  Doak.1  It 
is  now  in  operation.  When  there  is  no  longer  a  Director  General 
of  Railroads,  sorrfe  authority  must  be  selected  to  settle  deadlocks 
that  may  arise  in  any  board. 

Sixth,  the  program  of  legislation  which  the  National  Transpor- 
tation Conference  worked  out,  and  which  meets  with  my  ap- 
proval, and  with  the  approval  of  every  man  I  have  talked  with 
about  it — provides  that  the  Board  of  Directors  of  these  feder- 
alized railroad  corporations  which  are  contemplated  shall  contain 
at  least  two  representatives  of  the  employees  and  two  of  the 
public.  That  is  to  carry  out  specifically  the  idea  of  trusteeship 
which  the  chairman  emphasized  in  his  opening  remarks.  I  be- 
lieve it  will  be  very  helpful  to  the  railroads  and  of  benefit  to 
the  public. 

Seventh,  the  Transportation  Board  should  be  authorized  and 
required  to  inquire  into  the  practices  of  railroad  management  and 
to  propose  measures  for  preventing  abuses  therein.  We  have  had 
within  recent  years  a  good  many  unfortunate  examples  of  ir- 
responsible management  of  railroads  and  we  are  not  so  far  from 
that  past  history  as  to  be  certain  that  when  we  return  to  private 
ownership  unjustifiable  exploitation  may  not  again  be  possible. 
I  believe  that  abuses  should  be  prevented  by  the  searchlight  of 
investigation  and  information. 

Eighth,  the  general  duty'  of  a  transportation  board  should  be 
not  only  to  bring  about  the  healthy  development  of  railroads, 
but  the  coordination  of  railroads  with  waterways  and  with  high- 
ways in  order  that  this  country  may  have  in  the  not  distant  fu- 
ture a  well-rounded,  coordinated  national  transportation  system. 

One  other  power  has  been  recommended  for  this  board  and 
urged  in  certain  quarters  with  a  good  deal  of  force,  and  that  is 

1  See  pp  1-78 

[S76] 


No.  4]  THE  SCOPE  AND  FUNCTIONS  65 

that  the  new  board  should  be  responsible  for  the  finances  of  the 
railroads  in  that  it  should  determine  what  the  financial  needs 
of  the  carriers  are  and  certify  those  needs  to  the  Interstate 
Commerce  Commission. 

My  own  view  of  that  matter  has  always  been,  from  the  time 
it  was  first  brought  to  my  consideration,  that  it  would  be  unwise 
to  take  away  from  the  Interstate  Commerce  Commission  any 
of  its  responsibility  for  the  maintainance  of  revenues  ade- 
quate for  the  carriers.  The  Commission  is  the  authority  that 
passes  upon  the  rates.  It  should  feel  the  responsibility  of  de- 
termining what  the  revenue  needs  of  the  carriers  are  and  of  pro- 
viding the  rates  therefor.  If  some  other  authority,  outside  of 
the  Commission,  is  responsible  for  determining  the  revenue  needs 
of  the  carriers,  the  Commission  will  perhaps  not  act  with  that 
degree  of  responsibility  that  it  ought  to  feel ;  and  then  also,  it  is 
quite  possible  that  this  division  of  authority  and  responsibility 
between  the  two  boards  might  develop  undesirable  friction  be- 
tween the  two  authorities. 

Lastly,  what  kind  of  a  board  should  this  be?  Not  a  large 
board — five  members  are  better  than  more  because  its  purposes 
are  to  be  executive.  One  objection — and  it  is  a  strong  objec- 
tion— to  investing  executive  functions  with  the  Interstate  Com- 
merce Commission,  is  that  it  is  too  large  a  body  for  effective  ad- 
ministrative or  executive  work.  While  I  would  not  take  away 
from  the  commission  the  limited  executive  functions  it  now 
exercises — because  most  of  them  are  related  to  rate-making  and 
those  that  are  not  related  to  rate-making  are  not  difficult  to  ad- 
minister— I  do  not  think  it  would  be  wise  to  vest  executive  func- 
tions in  a  body  of  nine  or  eleven  men.  Boards  at  best  are  apt 
to  be  long,  narrow  and  wooden,  and  while  the  Interstate  Com- 
merce Commission  is  by  no  means  wooden,  nor  has  it  been  nar- 
row, it  is  long,  and  its  processes  would  be  slow. 

What  is  needed  is  quick,  intelligent,  effective  executive  action 
on  the  part  of  a  board  with  a  maximum  responsibility  for  the 
development  of  a  national  transportation  system. 


[577] 


THE  HOUSE  AND  SENATE  RAILROAD  BILLS 

RICHARD  WATERMAN, 
Secretary  Railroad  Committee  Chamber  of  Commerce  of  the  United  States 

WHEN  Dr.  Lindsay  asked  me  to  present  at  this  meeting 
a  summary  of  the  railroad  legislation  that  is  now  be- 
fore Congress  and  to  compare  the  two  bills,  I  asked 
for  leave  to  print.  That  is  what  they  usually  do  in  Washington. 
So  I  have  prepared  a  printed  chart  showing  in  parallel  columns 
the  important  provisions  of  the  Senate  and  House  bills  and  have 
asked  your  chairman  to  hand  a  copy  to  each  member  of  the 
Academy  who  attends  this  meeting.* 

Before  discussing  the  pending  bills  I  am  going  to  refer  briefly 
to  some  of  the  steps  that  have  been  taken  by  the  House  and  Sen- 
ate Committees  in  preparing  them.  Each  of  these  committees 
has  held  public  hearings  lasting  for  many  months.  At  these  hear- 
ings thirty  or  forty  different  plans  for  railroad  legislation  have 
been  laid  before  the  committees  and  later  printed  in  full  in  the 
reports  of  the  hearings.  Examination  of  this  testimony  shows 
that  almost  every  witness  who  came  before  the  committees  em- 
phasized in  one  way  or  another  four  essential  features  of  the 
railroad  problem  which  may  be  stated  as  follows : 

1.  If  the  country  is  to  grow,  the  railroads  must  grow. 

2.  Growing  railroads  require  a  constant  stream  of  new 
capital. 

3.  This  capital  can  only  be  attracted  on  the  basis  of  good 
earnings. 

4.  Good  earnings,  of  course,  mean  adequate  rates. 

When  the  time  came  to  introduce  legislative  measures  for  the 
consideration  of  Congress,  seven  bills  were  drafted,  of  which  two 
were  read  into  the  committee  record,  and  five  were  actually  in- 
troduced and  referred  to  the  Interstate  Commerce  Committees. 
These  two  committees,  after  considering  all  of  the  plans  and  all 
of  the  bills,  reported  out  two  separate  bills  that  differ  in  many 
important  particulars.  In  my  chart  I  have  compared  the  bills 
point  by  point.  Dr.  Lindsay  asked  me  to  read  the  comparison 
into  the  record,  but  as  you  have  it  in  hand,  I  am  simply  going  to 
read  a  brief  summary  of  the  comparison. 

*  Reproductions  of  Mr.  Waterman's  Charts  appear  on  pp.  75a-75b  and 
10Sa-10Sb.— Ed. 

[578] 


No.  4]  THE  HOUSE  AND  SENATE  RAILROAD  BILLS  67 

The  Esch  bill,  H.  R.  10453,  was  passed  by  the  House  of  Rep- 
resentatives November  17,  and  at  once  sent  to  the  Senate.  The 
Cummins  bill,  S.  3288,  was  reported  to  the  Senate  October  22 
by  the  Committee  on  Interstate  Commerce  and  will  probably  be 
taken  up  for  consideration  at  the  opening  of  the  regular  session 
of  Congress  December  1.  An  examination  of  the  chart  shows 
that  while  the  two  bills  have  many  points  in  common,  there  are 
certain  very  important  respects  in  which  they  differ. 

Ownership  and  Operation 
Both  bills  provide  for  the  return  of  all  railroads  and  transporta- 
tion systems  to  corporate  ownership  and  operation  on  the  last 
day  of  the  month  in  which  the  act  is  approved. 

Consolidation  and  Competition 

The  Senate  bill  provides  for  the  consolidation  of  all  railroad 
properties  in  accordance  with  a  plan  to  be  promulgated  by  the 
proposed  Transportation  Board  and  approved  by  the  Interstate 
Commerce  Commission,  into  twenty  to  thirty-five  separate  com- 
peting systems,  each  owned  and  operated  by  a  distinct  federal 
corporation — consolidation  to  be  voluntary  if  accomplished 
within  seven  years,  and  thereafter  to  be  compulsory. 

The  House  bill  provides  for  the  consolidation  of  any  two  or 
more  carriers  and  for  the  pooling  of  their  traffic,  earnings  and 
facilities  to  whatever  extent  the  Interstate  Commerce  Commission 
indicates  will  be  in  the  public  interest. 

Federal  Incorporation 

The  Senate  bill  provides  that  all  railroads  shall  be  required  to 
organize  under  a  federal  charter;  while  the  House  bill  opposes 
federal  incorporation. 

Capital  Expenditures  and  Security  Issues 

Both  bills  provide  for  exclusive  federal  regulation  and  control 
of  railroad  security  issues  and  capital  expenditures — the  Senate 
entrusting  this  regulation  to  the  Transportation  Board,  and  the 
House  to  the  Interstate  Commerce  Commission. 

Adequate  Revenues  and  Credit 

Both  bills  recognize  the  necessity  for  providing  the  railroads 
with  revenues  that  will  be  adequate  for  their  needs  and  will  re- 
sult in  restoring  their  credit. 

[579] 


68  RAILROAD  LEGISLATION  [Vol.  VIII 

Both  bills  provide  for  a  continuation  of  the  rates  that  are  in 
effect  at  the  termination  of  federal  control,  until  they  are  changed 
by  competent  authority. 

The  Senate  bill  requires  the  commission  to  divide  the  country 
into  rate-making  districts;  but  the  House  opposes  this  step,  be- 
lieving that  rate  making  based  on  average  conditions  of  carriers 
within  a  given  region  would  be  an  impossible  task. 

The  Senate  bill  proposes  a  new  rule  of  rate  making  that  makes 
it  mandatory  on  the  commission  to  fix  rates  that  shall  be  not  only 
just  and  reasonable,  but  also  adequate ;  but  the  House  bill  leaves 
the  commission  free  to  define  its  own  rule  of  rate  making. 

Both  bills  provide  for  a  continuation  of  the  present  plan  for 
the  valuation  of  all  railroad  properties  by  the  commission. 

The  Senate  bill  provides  for  the  creation  of  two  kinds  of  re- 
serve funds,  viz.,  a  company  reserve  fund  drawn  by  each  road 
from  its  own  excess  earnings  to  support  its  own  credit;  and  a 
general  contingent  fund  drawn  by  all  prosperous  roads  from  their 
excess  earnings  to  support  the  credit  of  the  railroads  of  the 
country  as  a  whole. 

The  House  bill  provides  for  the  creation  by  the  Government  of 
a  $250,000,000  revolving  fund  from  which  carriers  may  obtain, 
during  the  first  two  years  of  resumed  private  operation,  loans 
bearing  6%  interest  and  maturing  in  five  years. 

Both  bills  provide  for  equalizing  the  revenues  of  the  poor  and 
the  rich  roads  by  means  of  consolidation  effected  under  gov- 
ernmental authority. 

Both  bills  provide  that  for  six  months  after  federal  control  ends 
the  Government  shall  guarantee  to  all  railroads  an  operating  in- 
come equal  to  the  standard  return  for  the  same  period  paid  dur- 
ing federal  control. 

Both  bills  provide  for  funding  the  debt  of  the  carriers  to  the 
Government,  although  under  very  different  conditions. 

Wages  and  Working  Conditions 
Both  bills  provide  for  the  continuation  of  the  general  plan  for 
the  adjustment  of  labor  disputes  that  has  been  in  effect  during 
the  period  of  federal  control. 

The  Senate  bill  provides  for  the  creation  of  three  Regional 
Boards  of  Adjustment  to  hear  and  determine  disputes  other  than 
controversies  relating  to  wages  and  working  conditions ;  and  the 
creation  of  a  Committee  of  Wages  and  Working  Conditions  to 

[580] 


No.  4]  THE  HOUSE  AND  SENATE  RAILROAD  BILLS  69 

have  jurisdiction  over  all  controversies  respecting  the  wages  and 
the  working  conditions  of  railroad  employees.  In  addition  the 
Senate  bill  declares  that  railroad  strikes  and  lockouts  are  un- 
lawful. 

The  House  bill  provides  for  the  creation  of  three  Boards  of 
Adjustment  to  hear  and  decide  disputes  between  the  railroads  and 
certain  classes  of  their  employees,  and  three  Appeal  Commissions 
to  consider  appeals  sent  to  them  by  the  three  Adjustment  Boards. 

Federal  Agencies  of  Regulation 

Both  bills  provide  for  the  exercise  of  many  new  regulatory 
functions  by  the  Federal  Government — the  Senate  bill  creating- 
a  new  agency  to  exercise  the  new  functions,  and  the  House  bill 
entrusting  all  of  the  new  functions,  as  well  as  the  old,  to  the  In- 
terstate Commerce  Commission. 

The  Senate  bill  provides  for  the  maintenance  of  the  Interstate 
Commerce  Commission  with  its  rate  making,  valuation  and  ac- 
counting functions ;  and  also  for  the  creation  of  a  Transportation 
Board  to  plan  and  supervise  railroad  consolidations,  to  regulate 
security  issues  and  capital  expenditures,  to  serve  as  a  final  board 
of  appeal  in  labor  controversies,  to  exercise  certain  executive 
and  administrative  functions  now  exercised  by  the  Interstate 
Commerce  Commission,  and  to  perform  many  other  important 
federal  regulatory  functions. 

The  House  bill  establishes  no  new  agency  for  railroad  legisla- 
tion but  provides  for  the  maintenance  of  the  Interstate  Commerce 
Commission  with  two  additional  members  and  with  authority  to 
exercise  all  of  its  present  functions  and  many  new  ones. 


[581] 


WHY  RAILROAD  REGULATION  HAS  FAILED 

H.  T.  NEWCOMB 
Lawyer,  New  York 

THE  situation  of  the  railways  of  the  United  States  at  the 
present  moment,  as  developed  in  these  discussions  during 
the  last  few  days,  is  very  easily  summarized,  and  in  very 
few  words. 

On  two  days'  notice,  at  the  end  of  1917,  the  owners  of  the  prop- 
erties were  expropriated  in  the  face  of  a  great  national  emer- 
gency which,  under  the  conditions  then  existing,  undoubtedly 
made  that  expropriation  necessary.  For  the  two  years  that  have 
ensued  they  have  been  managed  by  public  officers  and  with  this 
result,  that  the  Government  of  the  United  States  has  sustained 
a  heavy  loss  each  year  through  the  insufficiency  of  the  revenues 
to  make  up  the  expenses  which  the  Government  incurred ;  a  thou- 
sand millions  of  dollars  have  been  added  to  the  wages-expense 
of  the  railroads ;  wages  have  been  raised  as  though  there  were  a 
bottomless  pocket  from  which  to  draw  the  funds  necessary  to 
meet  them.  The  properties  have  been — owing  to  exigencies  that 
probably  could  not  have  been  avoided — undermaintained,  and 
are  no  longer  in  the  excellent  condition  in  which  they  were  when 
taken  over.  All  expenses  of  operation  have  gone  up,  not  only 
through  wages,  but  through  the  greater  cost  of  all  the  materials 
and  supplies  necessary  for  operation. 

Now  that  the  railways  are  to  be  handed  back  to  the  owners  and, 
under  these  conditions,  they  ask  a  guarantee  for  the  short  period  of 
six  months  in  order  that  they  may  have  time  to  adjust  themselves 
to  the  new  conditions  and  to  develop  and  restore  the  efficiency 
which  they  had  before  their  organizations  were  destroyed,  before 
the  properties  were  taken  out  of  the  hands  of  their  proper  officers, 
those  selected  by  the  security  owners.  This  guarantee  is  more 
necessary  in  the  interest  of  general  industrial  stability  and  public 
welfare,  than  in  that  of  any  railway  or  any  group  of  investors  in 
railway  securities. 

It  seems  to  be  admitted,  without  qualification,  that  most  of  the 
regulation  which  we  had  up  to  the  end  of  1917,  when  this  hap- 
pened, was  not  wholly  successful.  My  friend,  Professor  Johnson, 
suggests  that  we  should  have  a  transportation  board.     I  take  it 

[582] 


No.  4]  WHY  RAILROAD  LEGISLATION  HAS  FAILED  71 

that  this  board  is  to  regulate  the  Interstae  Commerce  Commis- 
sion. I  wonder  who  would  regulate  the  transportation  board 
and  how  soon  regulation  of  the  transportation  board  would  be- 
come necessary?  "Big  fleas  have  little  fleas  to  bite  'em  and  so 
on  ad  infinitum." 

We  commenced  this  form  of  regulation  in  1887  with  a  very 
modest  attempt;  a  law  depending  principally  on  publicity,  de- 
claring the  principles  of  the  common  law  that  there  shall  be 
no  unjust  discrimination  and  no  excessive  rates ;  forbidding 
pooling,  that  is  attempting  to  enforce  competition,  and  enacting, 
as  perhaps  its  most  rigorous  provision,  the  "long  and  short-haul" 
clause,  but  partly  subject  to  dispensing  power  on  the  part  of  the- 
Commission  and  not  en  forcible  at  all  except  under  substantially 
dissimilar  circumstances  and  conditions. 

Of  course  that  statute,  as  everybody  knows,  was  a  compromise. 
No  one  really  wanted  an  Interstate  Commerce  Commission  at 
that  time.  The  advocates  of  drastic  regulation  proposed  a  meas- 
ure which  would  contain  hard  and  fast  rules  that  would  have  to 
be  obeyed,  and  the  Commission  was  inserted  as  a  compromise 
between  those  who  wanted  very  drastic  regulation  and  those  who 
did  not  want  any  regulation  at  all.  That  act  was  amended  in 
1889 ;  in  1891 ;  in  1893,  when  we  obtained  the  act  which  permitted 
the  United  States  to  compel  testimony  from  persons  who  claimed 
that  their  testimony  might  be  self -incriminatory. 

In  1903  we  had  the  Elkins  Law  and  the  Expedition  Act;  in 
1906  the  Hepburn  Law  which,  for  the  first  time,  conferred  real 
rate-making  power  upon  Federal  officers,  and  in  1910  we  obtained 
the  regulation  which  finally  made  operation  of  the  railroads  dur- 
ing an  emergency  impossible — the  statute  giving  the  Interstate 
Commerce  Commission  power  to  suspend  changes  in  rates,  thus 
making  it  impossible  promptly  to  adjust  rates  to  changed  con- 
ditions. 

That  act,  of  course,  had  its  natural  result.  The  fall  in  the  value 
of  money  which  had  commenced  in  1896  and  gone  forward  very 
rapidly  up  to  1914,  the  beginning  of  the  war,  became  very  rapid 
in  1914,  and  much  more  rapid  after  1915,  and  rate  schedules  to 
which  the  railroads  were  tied  partly  by  statute  and  partly  by 
custom,  became  totally  inadequate  under  the  situation  thus  de- 
veloped. The  money  which  they  received  was  measured  in  de- 
preciated currency  and  was  insufficient,  and  the  act  of  1910  made 
it  impossible  for  them  to  correct  that  situation. 

[583] 


72  RAILROAD  LEGISLATION  [Vol.  VIII 

Consider  this  contrast.  Our  fathers  went  through  the  Civil 
War,  a  war  which  for  four  years  made  drains  upon  the  man  and 
money  power  of  this  Nation  infinitely  greater  than  anything  that 
happened  to  us  during  the  twenty  months  of  our  participation  in 
the  European  war,  months  that  succeeded  our  period  of  wonder- 
ful prosperity  while  not  engaged  in  the  great  war.  Yet  during  the 
Civil  War  no  railroad  not  in  the  immediate  track  of  hostilities 
had  to  be  or  was. taken  over  by  the  Government.  There  was  then 
infinitely  greater  need  for  railways  for  the  prompt  movement  of 
troops.  There  was  infinitely  greater  need  of  going  to  the  money 
market  and  getting  the  last  cent  that  market  could  supply,  but 
it  was  not  necessary  to  take  over  the  railroads.  Has  any  one  any 
doubt  why  it  was  necessary  in  1917  to  take  them  over?  Because, 
although  the  power  of  the  President  of  the  United  States  could 
take  these  properties  into  the  hands  of  the  Government,  the 
power  of  the  President  of  the  United  States  could  not  direct  the 
Interstate  Commerce  Commissioners  to  grant  a  speedy  and  rapid 
increase  in  rates  and  thus  to  permit  precisely  the  sort  of  adjust- 
ment that  was  made  all  through  the  Civil  War. 

During  the  Civil  War  period  the  railroads  adjusted  their  rates, 
almost  daily,  to  the  depreciated  value  of  the  currency  in  which 
they  were  paid.  During  the  war  through  which  we  have  just 
passed,  no  such  power  existed  and  in  order  that  the  Government 
of  the  United  States  might  have  ready  recourse  to  the  money 
markets,  in  order  that  failures  of  railroads  to  pay  interest  on 
their  bonds  should  not  create  a  situation  which  would  make  it 
impossible  for  the  United  States  to  borrow — it  would  greatly 
increase  the  difficulty  of  financing  the  war — it  was  necessary  to 
take  them  over.  They  weren't  taken  over  for  any  other  reason 
at  all.  There  was  no  question  of  inefficiency.  At  the  end  of  1917 
the  railroads  were  carrying  more  freight  and  carrying  it  better 
and  performing  all  the  services  for  which  they  existed  with 
higher  efficiency  than  at  any  other  time  in  the  history  of  those 
properties.  There  was  no  reason  for  the  expropriation  of  their 
owners  except  the  financial  reason. 

Now  the  question  is,  whether  we  are  to  go  back,  at  this  period, 
to  the  same  form  of  regulation  which  we  have  had,  which  pro- 
duced those  particular  results  and  which,  if  we  go  back  to  it,  will 
leave  the  railroads  forever  in  the  condition  of  being  unable  to 
respond  to  any  great  national  emergency,  not  through  any  lack 
of  efficiency  on  the  part  of  the  men  who  operate  the  railroads  and 

[584] 


No.  4]  WHY  RAILROAD  LEGISLATION  HAS  FAILED  73 

have  direct  responsibility  for  their  operation  but  because  the 
Government  of  the  United  States  has  tied  those  men  hand  and 
foot  and  they  are  unable  to  make  the  price  adjustments  which 
every  other  business  industry — except  the  regulated  industries  in 
this  country — is  able  to  make. 

For  thirty  years  I  have  lived  in  the  midst  of  this  regulation,  a 
close  and  a  constant  witness  of  the  misadventures  of  the  legisla- 
tive attempts  which  I  have  very  briefly  attempted  to  review. 
Every  failure  and  every  inadequacy  of  that  legislation  has  been 
an  argument  for  more  legislation  along  the  same  line.  No 
failure,  no  inadequacy,  has  ever  been  advanced  as  an  argument 
for  abandoning  the  plan,  or  for  changing  or  modifying  the  plan, 
but  every  failure  has  been  an  excuse  for  more  action,  and  more 
drastic  action,  along  the  same  precise  line.  Thus  every  false 
step  has  led  to  another  equally  false  and,  continuously,  we  have 
gone  further  in  a  wrong  direction.  Therefore,  without  forgetting 
any  aphorism  that  you  may  think  applicable,  I  wish  now  to  ask 
whether  mistakes  must  forever  be  reasons  for  more  mistakes? 


[S8S] 


AN  ENGINEER'S  POINT  OF  VIEW 

HILLHOUSE  BUEL 
Industrial  Engineer 

THE  subject  of  railroads  is  possibly  as  interesting  as  any 
subject  that  we  have  to  deal  with,  because  it  is  one  of  the 
three  major  divisions  of  our  activities,  namely,  produc- 
tion, distribution  and  consumption.     It,  therefore,  enters  into  all 
the  factors  of  our  lives. 

Government  Operation 

I  have  been  interested  in  following  the  different  bills  that 
have  been  presented  in  Congress,  and  the  different  comments 
that  have  been  made  upon  them.  The  remarks  in  regard  to  the 
Plumb  Plan  bring  out  the  question  of  government  ownership 
or  control. 

I  would  like  to  say  just  briefly  that  government  ownership, 
operation  or  control,  while  it  might  operate  satisfactorily  in  an 
autocracy,  if  your  autocrat  were  wise,  will  not  work  out  satis- 
factorily in  a  democracy  such  as  we  have  to-day.  Although  we 
may  change  our  democracy  in  the  future,  under  our  present 
form  of  democracy,  we  woud  find  that  government  ownership 
would  impose  upon  us  a  paternalism  which  would  destroy  incen- 
tive, paralyze  initiative,  and  retard  progress. 

In  the  second  place,  the  officers  would  be  appointed/  not  for 
their  experience  and  ability,  but  on  account  of  their  influence 
and  usefulness  to  the  prevailing  party.  This  could  only  lead  to 
inefficiency.    It  is  not  the  way  we  solve  economic  problems. 

Faulty  Organisation 
Recently  we  have  had  an  illustration  of  improper  organization 
at  Washington  in  the  National  Industrial  Conference.  To  start 
with,  the  conference  was  improperly  composed.  The  men  were 
not  selected  on  account  of  their  special  fitness  to  solve  economic 
problems.  Secondly,  the  conference  was  improperly  organized 
and  its  methods  of  procedure  were  opposed  to  economic  law. 
It  was  organized  into  two  or  three  conflicting  groups  that  were 
to  oppose  each  other  and  to  arrive  at  their  conclusions  by  arbi- 
trary determinations,  compromise,  barter  or  the  numerical  pon- 
derance  of  a  mere  vote. 

[586] 


No.  4]  AN  ENGINEER'S  POINT  OF  VIEW  75 

Solving  Economic  Problems 
Now,  economic  problems  are  not  solved  by  guess  work,  and 
they  are  not  solved  by  a  mere  vote.  If  you  want  to  know  how 
many  peas  there  are  in  a  pod,  you  do  not  call  a  conference  and 
take  a  vote  on  it.  Economic  problems  should  be  solved  by  ac- 
curate and  thorough  observation  as  a  basis  for  exact  and  scien- 
tific determinations.  When  you  constitute  these  different  bodies 
that  are  to  solve  your  economic  problems  with  properly  chosen 
engineers — transportation  engineers,  industrial  engineers,  and 
production  engineers,  managers  who  have  had  successful  expe- 
rience in  the  operation  of  their  different  activities,  and  your  va- 
rious operatives  that  cover  the  successful  operations  in  yo'ur  dif- 
ferent departments — when  you  have  brought  together  a  body  or 
staff  of  such  material,  you  will  have  a  fair  chance  first,  to  see 
that  the  situation  is  properly  observed  as  a  prerequisite  for  your 
future  determinations,  and  second,  that  you  have  the  men  quali- 
fied to  make  the  careful,  exact  determinations  necessary  for  sane, 
workable,  economic  operations  of  the  transportation  units. 

A  Comparison 

To  the  gentlemen  who  stated  that  "we  are  the  only  country 
in  the  world  that  does  not  own  its  own  roads,"  I  wish  to  answer 
first,  that  his  statement  is  a  bit  broad,  and  second,  that  a  com- 
parison of  the  growth  and  development  of  our  railroads  and  our 
country  with  the  other  countries  of  the  world  would  seem  to  com- 
mend our  system  over  all  others.  I  sincerely  trust  we  will  have 
the  good  sense  not  to  destroy  or  impair  that  incentive  which,  in 
a  brief  one  hundred  years,  has  made  us  in  production  and  prog- 
ress the  giant  and  premier  country  of  the  world." 

Much  has  been  said  in  support  of  consolidating  and  regrouping 
the  railroads  under  a  board,  something  of  zoning  by  public  offi- 
cials, and  much  more  about  the  expenditure  of  capital,  the  equali- 
zation of  revenues  with  the  contingent  fund  and  refinancing.  To 
these  issues  I  want  to  reply  briefly. 

Wise  and  Unwise  Consolidations 
It  has  been  my  experience  that  consolidations  are  commonly 
effected,  wittingly  or  unwittingly,  with  total  disregard  of  what 
functions  can  or  cannot  be  consolidated  with  good  results.  The 
provisions  advocated  and  those  embodied  in  bills  now  pending  or 
heretofore  submitted  to  Congress  if  enacted  or  made  effective 
would  ultimately  disorganize  and  greatly  impair  the  entire  trans- 

[587] 


75a 

r 


THE  Chamber  of  Commerce  of  the  United  States  has 
prepared  the  accompanying  chart  to  show  in  con- 
venient form  for,  comparison  by  busy  men  seven- 
proposed  plans  for  railroad  legislation.  In  all  probability 
one  of  these  plans  will  be  enacted  into  law  before  the 


Proposed  Plans  foi 

A  Summary 

Secretary,  Railroad  Committee  Cham 

President  returns  the  railroads  to  their  owners  on  Ji 
uary  first. 

The  Transportation  Conference  plan  is  proposed  by  i 
National  Transportation  Conference  which  was  h 
under  the  auspices  of  the  Chamber  of  Commerce  of  I 


Senate  Committee  Plan 

The  Cummins  Bill  S-2906  pre- 
sents the  recommendations  of  the 
sub-committee  of  the  Senate 
Com  m  l  ttee  on  I  nter state  Com- 
merce.   |t  provides  for; — 


Commerce   Commission    Plan. 

The  Esch-Pomerene  Bill  H.  R. 
4378  presents  the  plan  proposed 
by  the  Interstate  Commerce  Com* 
mission.     It  provides  for:— 


Railway  Executives  Plan 

The    tentative    draft   of    a 
laid  before  the  House  Com  mil 
by  T.  D.  Cuyler,  President  of 
Association    of    Railway     Exfl. 
tlves,  provides  for;— 


Ownership 

and 
Operation 


Ownership  and  operation  of  all 
the  railroads  Id  the  United  States 
by  20  to  36  separate  competing 
systems. 


Ownership  and  operation  of  all 
railroads  by  private  corporations 
under   broad   federal  supervision. 


Ownership  and  operation  of 
railroads  by  private  corporatl 
under  a  broad  national  con' 
and  a  unified  system  of  govs 
ment  regulation. 


Consolidation 

and 
Competition 


Consolidation     of    all     railroad 

f properties  Into  20  to  36  systems 
n  accordance  with  a  plan  pre- 
viously adopted  by  the  Railway 
Transportation  Board  and  ap- 
proved by  the  Interstate  Com- 
merce Commission— consolidation 
to  be  voluntary  If  accomplished 
within  seven  years,  and  if  not* 
compulsory. 


Consolidation  of  existing  rail- 
road systems  when  approved  by 
the  Interstate  Commerce  Com- 
mission. 


Consolidation  of  existing  U 
Into  strong  competitive  systt 
wherever  found  to  be  In  the  p 
He  Interest;  and  also  provla 
for  Joint  use  of  equipment  t 
terminal*  when  In  the  public 
tereet 


Federal 

Incorporation 


Federal  Incorporation  of  all  rail- 
roads with  a  requirement  that 
each  corporation  shall  include  in 
Its  Board  of  Directors  two  repre- 
sentatives of  classified  employees 
and  two  representatives  of  the 
gov  orn  ment. 


Opposition  to  federal  Incorpora- 
tion as  a  complicated,  protracted 
and  probably  unconstitutional 
method. 


Provision  for  permissive  fl 
oral  incorporation  of  all  Interst  I 
carriers. 


Security  Issues 
and  Capital 
Expenditures 


Exclusive  regulation  and  con- 
trol by  the  Interstate  Commerce 
Commission  of  the  Issuance  of 
railway  stocks  and  bonds  and  of 
the  purposes  to  which  the  pro- 
ceeds thereof  may  be  applied. 


Full  control  by  the  Interstate 
Commerce  Commission  over  stock 
and  bond  Issues  and  over  the  ex- 
penditure of  the  proceeds. 


Exclusive  national  control  t 
the  issue  of  securities  and  the  a 
penditure  of  new  capital — 1 1 
control  to  be  exercised  by  | 
Federal  Transportation    Board 


Adequate 

Revenues 


Initiation  of  rates  by  carriers 
subject  to  the  approval  of  the  In- 
terstate Commerce  Commission. 

Requirement  that  the  Inter- 
state Commerce  Commission  shall 
divide  the  country  Into  rate  dis- 
tricts and  the  carriers  Into  rate 
groups  for  rate  making  purposes. 

Regulation  of  all  rates  that  af- 
fect interstate  commerce  by  the 
Interstate  Commerce  Commission 
under  a  statutory  rule  providing 
that  In  making  rates  for  the  sev- 
eral rate  groups  the  Commission 
shall  take  into  consideration  the 
Interest  of  the  public,  the  ship- 
pers, the  wages  of  labor,  the  cost 
of  maintenance  and  operation.  In- 
cluding taxes  and  a  fair  return  on 
the  value  of  the  property. 


Regulation  of  rates  by  the  In- 
terstate Commerce  Commission 
under  the  provisions  of  the  Act 
to  Regulate  Commerce  with, 
amendments  shortening  the  pe- 
riod of  suspension  of  rates,  au- 
thorizing the  Commission  to  de- 
termine the  division  of  rates 
between  carriers,  to  consider  the 
cost  of  service  principle  In  fixing 
rates,  and  to  exercise  other  broad 
powers  affecting  the  general  rate 
structure. 


Initiation  of  rates  by  the  c 
rlera. 

Exclusive  regulation  of  rai 
by  the  Interstate  Commerce  Co 
mission  with  the  aid  of  Regto  I 
Sub-commissions  under  a  sta  I 
tory  rule  prescribing  that  I 
level  of  rates  shall  provide  re  I 
nue  sufficient  to  pay  wages  1 1 
other  expenses  of  operation  1 1 
a  fair  return  on  the  value  of  I 
property  used  in  the  public  si 
v'-*e  and  to  establish  and  ma  I 
tain  a  credit  sufficient  to  attr  I 
the  new  capital  necessary  to  m  i 
the  public  need  for  transport 
tion  facilities. 

Certification  by  the  Fede  I 
Transportation  Board  to  the  | 
terstate  Commerce  Commlse  I 
of  the  amount  of  opuaUns  re| 
the  tcarrlers 


nues  needed 
enable  them 
functions. 


by 


to    perform    til  { 


Wages  and 
Working  Conditions 


Creation  of  a  committee  of 
wages  and  r-^orklng  conditions 
(four  employees  and  four  repre- 
sentatives of  the  companies)  to 
settle  disputes;  with  appeal  to  the 
Transportation  Board  in  case  of 
deadlock. 

Declaration  that  decisions  of 
the  Board,  I.  e.,  of  the  Govern- 
ment, shall  be  final,  and  that 
railroad  strikes  and  lockouts  are 
forbidden. 


(No  declaration.) 


(No  declaration.) 


Federal  Agencies 
of  Regulation 


Continuance  of  the  Interstate 
Commerce  Commission  with  en- 
larged powers  to  regulate  rates 
and  security.  Issues. 

Creation  of  a  Railway  Trans- 
portation Board  with  five  mem- 
bers appointed  by  the  President 
to  perform  many  important  ex- 
ecutive and  administrative  func- 
tions, including  some  now  per- 
formed by  the  Interstate  Com- 
merce Commission. 


Maintenance  of  the  Interstate 
Commerce  Commission  with  all 
of  its  present  powers  and  in  ad- 
dition authority;  to  regulate  car- 
riers by  water;  to  control  con- 
solidations, joint  use  of  facilities 
and  the  pooling  of  freight  earn- 
ings: to  authorize  additions,  ex- 
tensions, and  the  construction  of 
new  lines;  to  adjust  conflicts  be- 
tween federal  and  state  jurisdic- 
tions; and  to  control  security  is- 
sues and   capital   expenditures. 


Maintenance  of  the  Interst 
Commerce  Commission  with  I 
thority  to  regulate  rates  and 
continue  Its  present  valuatl 
and  accounting  functions. 

Creation  of  a  Federal  Trai 
portatlon  Board  composed 
three  Commissioners  appoint 
by  the  President  and  chari 
with  the  general  oversight  fn 
the  point  of  view  of  the  pub 
Interest,  of  all  transportatl< 
This  board  would  be  co-ordlni 
with  the  Interstate  Comraei 
Commission  and  would  relieve 
of  all  functions  except  rate  re* 
latlon.   valuation  and  accounUi 


[587a] 


I 


75b 


ilroad  Legislation 

hard  Waterman 

mmerce  of  the  United  States 

d  States,  and  included  in  its  membership  promi- 
men  belonging  to  every  important  interest  affected 
ransportation — commercial,  industrial,  agricultural, 
ial,  labor,  governmental,  economic,  civic  and  social, 
fundamental  features  of  this  plan,  printed  below  in 


black-face  type,  have  been  approved  by  a  referendum 
vote  of  the  business  men  of  the  country.  Certain  a<*- 
ditional  features  of  the  Conference  plan,  printed  below  in 
light-face  type,  are  in  harmony  with  the  remainder  of  the 
plan, but  have  not  yet  been  submitted  to  a  referendum  vote 


ispoi  tation  Conference 

Frellnghuysen  Bill  S.  2998 
is  the  pian  proposed  by 
tlonal  Transportation  Con- 
held  by  the  U.  S.  Cham- 
Commerce:— 


rship  and  operation  of  ail 

railroads    in    sne     United 

by     federal     corporations 

I  comprehensive  system  of 

ment    regulation. 


nidation    of    existing    rail- 
'Into     strong     competitive 
i     under     conditions     pre- 
by    the    Federal    Trans* 
n    Board;    with    provision 
after  five  years  the  con- 
on  planned  by  the  Board 
welt  advanced,  the  Board 
quire   their  completion. 


Warfield  Plan 

The  tentative  draft*  of  a  bill 
laid  before  the  House  Committee 
by  S.  Davles  Warfield,  President 
of  the  National  Association  of 
Owners  of   Railroad    Securities: — 


Ownership  and  operation  of  all 
of  the  railroads  of  the  country  by 
the  existing  railroad,  companies. 


Permission  to  consolidate  exist- 
ing railroads  when  found  by>the 
Interstate  Commerce  Commis- 
sion to  be  compatible  with  the 
public  Interest. 


Amster  Plan 

The  Uenroot  Bill  S.  2889  pre- 
sents the  plan  proposed  by  Na- 
than L.  Amster,  President  of 
the  Citizens  National  Railroads 
League.      It    provides    for:— 


Ownership  and  operation  bf  all 
railroads  by  one  privately  owned 
and  privately  operated  railroad 
company  with  full  public  control. 


Complete  consolidation  of  all 
railroad  companies  into  a  single 
national  corporation  thus  putting 
an   end   to   competition. 

Valuation  at  which  each  rail- 
road is  acquired  to  be  determined 
by  averaging  original  cost  less 
depreciation,  reproduction  cost 
less  depreciation  and  net  earn- 
ings over  last  ten  years  capital- 
ized at  6%. 


Plumb  Plan 

The  Sims  Bill  H.  R.  8157  pre- 
sents the  plan  proposed  by  Glenn 
E.  Plumb,  and  endorsed  by  the 
Railroad  Brotherhoods.  It  pro- 
vides for: — 


Ownership  of  all  railroads  by 
the   United    States   Government. 

Operation  of  ail  railroads  as  a 
single  system  by  a  corporation 
composed    of    railroad    employees. 


Consolidation  of  all  of  the  rail- 
roads Into  a  single  national  sys- 
tem; and  elimination  of  all  com- 
petition. 


al  Incorporation  of  all  ex- 
allroad  companies  and  of 
v  consolidated  companies 
i  requirement  that  each 
J  company  shall  be  man- 
12  directors  of  whom  8 
elected  to  represent  the 
Iders,  2  to  represent  the 
les  and  2  to  represent  the 
il  Interests  in  the  terrl- 
*ved  by  the  system. 


Opposition  to  federal  incorpora- 
tion on  the  ground  that  It  Is  un- 
necessary, is  probably  unconstit- 
utional and  would  Involve  end- 
less litigation. 


Federal  Incorporation  of  the 
National  Railway  Corporation 
with  a  board  of  eleven  directors, 
including  one  director  represent- 
ing the  Interstate  Commerce 
Commission,  one  the  State  Com- 
missioners, two  the  employees. 
two  commerce  and  Industry,  two 
the  farmers  and  three  the  stock- 
holders. 


slve  federal   regulation   of 

Ital  expenditures  and  the 

issues    of    all    railroads 

In    Interstate    commerce. 


Supervision  by  the  Interstate 
Commerce  Commission  (in  con- 
junction with  the  six  Regional 
Commerce  Commissions),  over 
issue  and  sale  of  securities  and 
over  the  expenditure  of  proceeds. 


Complete  supervision  by  the  In- 
terstate Commerce  Commission 
of  the  Issuance  of  all  securities 
and  the  expenditure  of  the  pro- 
ceeds. 


tlon  of  rates  by  the  car- 
ibject  to  the  approval  of 
erstate    Commerce    Com. 

atlon  of  all  rates  that  af- 
erstate  commerce  by  the 
te  Commerce  Commission 
h  statutory  rule  providing 
«  rate  structure  shalt  be 
d  to  yield  a  net  return 
m  the  aggregate  fair 
f  the  roads  In  each  traffic 
iof  the  country. 
Mon  of  an  individual  con- 
fund  by  each  road  to  sup- 
i  own  credit;  and  of  a 
contingent  fund  main- 
toy  contributions  from  ail 
ous  roads  to  support  the 
t  all  railroads. 


Initiation  of  rates  by  the  car- 
riers; and  consideration  of  pro- 
posed changes  In  rates  before 
the  schedules  are  filed  with  the 
Commission)  by  rate  committees 
composed  of  representatives  of 
the  railroads  and  the  shippers. 

Maintenance  of  a  general  rate 
level  by  the  Interstate  Commerce 
Commission  under  a  statutory 
rule  prescribing  that  rates  shall 
as  nearly  as  possible  produce  not 
less  than  6<%  on  the  aggregate 
property  Investment  account  of 
the  railroads  grouped  in  each  of 
the  three  classification  terri- 
tories; each  railroad  receiving  as 
much  of  the  6<%  as  its  efficiency 
in  operation  may  secure  for  it 
under  competitive  conditions. 

Distribution  of  the  excess  earn- 
ings of  each  road.  1/3  to  the 
road  and  2/3  to  be  divided 
equally  between  labor  and  the 
public. 


Initiation  of  at)  rates  by  the 
Corporation.  Regulation  of  rates 
by  the  Interstate  Commerce 
Commission  under  a  statutory 
rule  providing  that  rates  shall  be 
at  least  adequate  to  produce 
revenues  sufficient  to  pay  alt 
proper  operating  expenses  and 
fixed  charges,  to  pay  maximum 
dividends  on  all  outstanding 
stock  and  in  addition  to  produce 
a*  sum  not  exceeding  2^>  of  the 
par  value  of  all  outstanding 
stock. 

Government  guarantee  uf  a  4% 
dividend  on  all  stock  issued  by 
the  Corporation;  payment  of  a 
maximum  dividend  of  6<&  when 
earned:  and  distribution  of  all 
earnings  in  excess  of  6% — 10°?* 
to  labor.  30%  to  the  public  for 
improvements  and  retiring  out- 
standing stock  and  30%  to  the 
stockholders. 


traent    of    wages,     hours 

and  other  conditions  of 

of    employees    by   boards 

|ng   of    equal    numbers    of 

itatlves  of  employees  and 

of  the  railroads,  with  ap- 

case  of  a  deadlock  to  the 

Transportation   Board  as 


Authorization  of  each  Regional 
Commission  to  act  as  a  Board  of 
Conciliation  or  Arbitration  In  all 
controversies  between  the  car- 
riers and  the  employees  in  its  re- 
gion. Its  decisions  being  subject 
to  reviiw  by  the  Interstate.  Com- 
merce Commission. 


Appointment  from  time  to  time 
of  advisory  boards  composed  of 
equal  numbers  of  representatives 
of  the  employees  and  of  the  Cor- 
poration to  investigate  demands 
relating  to  wages,  hours  of  labor 
or  working  conditions  and  pub- 
lish their  findings  r.nd  recommen- 
dations which,  however,  shalt  not 
be  binding  on  either  side. 


enance  of  the  Interstate 
ce  Commission  with  all  of 
snt  powers  and  with  cer- 
dltlonal  powers  over  rates. 
on  of  a  Federal  Trans- 
n  Board  of  five  members 
»d  by  the  President  to 
i  the  development  of  a 
system  of  rail,  water 
Ihway  transportation,  to 
■  Into  and  propose  meas- 
preventing  abuses  there- 
in upon  the  public  neces- 
capital  expenditures  and 
ate  security   Issues. 


Continuation  of  the  Interstate 
Commerce  Commission  to  control 
and  regulate  rates,  adjust  wages 
and  perform  other  regulatory 
functions  belonging  to  the  fed- 
eral government. 

Creation  of  six  Regional  Com- 
merce Commissions  to  exercise 
concurrent  Jurisdiction  with  the 
Interstate  Commerce  Commis- 
sion. 

Formation  of  the  National 
Railways  Association,  a  corpora- 
tion managed  by  nine  Interstate 
Commerce  Commissioners  and 
eight  representatives  of  the  rail- 
roads to  furnish  a  great  clearing 
jT^Js^^o^j^a^roadoperatlon^^^ 


Maintenance  of  the  Interstate 
Commerce  Commission  with  all 
of  its  present  powers'  and  In  ad- 
dition authority  to  regulate  se- 
curity Issues  and  cVpltal  expen- 
ditures and  to  exercise  other 
broad    regulatory  functions. 

Creation  of  an  Efficiency  and 
Economy  Board  of  five  members 
appointed  by  the  President — four 
from  a  list  submitted  by  the  na- 
tional engineering  societies  and 
one  nominated  by  the  employees 
—to  study  facilities  and  service 
and  to  devise  and  recommend 
Improvements  In  physical  equip- 
ment and   In  operating  methods. 


Federal  incorporation  of  the 
National  Railways  Operating 
Corporation  for  a  term  of  100 
years  with  a  board  of  15  direc- 
tors— 5  named  by  the  President.  6 
elected  by  the  operating  offlclais 
and  5  elected  by  the  classified 
railroad  employees. 


Issue  of  all   railroad  securities 

by  the  United  States  Government 

Expenditures  of  all  capital  funds 

for     railroad     purposes     by     the 

United  States  Government. 


Initiation  of  all  rates  by  the 
National  Railway  Operating  Cor- 
poration. 

Regulation  of  ail  rates  by  the 
Interstate  Commerce  Commission. 

Payment  of  deficit  (if  any)  by 
the   United   States   Government. 

Distribution  of  surplus  earn- 
ings (If  any)  after  operating  ex- 
penses are  paid  and  fixed  charges 
are  met.  including  the  Interest 
on  outstanding  government  se- 
curities— Vt  to  the  government 
and  %  to  the  railroad  employees. 


Determination  of  wages  by  the 
Board  of  Directors  of  the  Cor- 
poration. 

Adjustment  of  disputes  between 
officials  and  men  by  boards  to 
which  the  operating  officials  elect 
5  members  and  the  men  5  mem- 
bers; with  appeal  to  the  Direc- 
tors In  case  the  Board  falls  to 
reach  an  adjustment 


Maintenance  of  the  Interstate 
Commerce  Commission  with  Its 
present  rate-making   powers. 

Creation  of  the  Railway  Board 
of  Appraisement  and  Extension 
composed  of  the  nine  Interstate 
Commerce  Commissioners  and 
three  other  members  selected  by 
the  Directors  of  the  Corporation 
to  determine  the  amount  of  com- 
pensation to  be  paid  to  the  pres- 
ent owners  of  the  roads  ari  the 
amount  to  be  paid  for  new  exten- 
sions and   improvements. 


[587b] 


76  RAILROAD  LEGISLATION  [Vol.  VIII 

portation  system,  would  greatly  retard  and  impede  industry  and 
commerce  and  only  result  in  heavy  loss  to  the  whole  country. 

Our  experience  during  the  war  with  uneconomic  overconsoli- 
dations  and  over-centralizations  attempted  without  a  proper 
knowledge  of  the  fundamental  principles  of  economic  organiza- 
tion and  distribution  of  functions,  should  cause  us  to  pause  be- 
fore we  plunge  headlong  into  other  top-heavy  consolidations, 
which  are  not,  as  a  prerequisite,  squarely  founded  on  scientific 
economic  determinations  of  all  factors  involved.  We  have  seen 
war  organizations  that  worked  well  in  large  cities  break  down 
with  costly  results  when  applied  by  the  same  officials  to  the 
country  as  a  whole,  because  they  did  not  understand  the  funda- 
mental principles  of  organization  and  economic  adjustment  of 
functions.  Consolidations  should  be  limited  to  normal  exten- 
sions and  combinations  which  have  an  economic  value,  preserving 
all  proper  economic  competitive  factors.  A  contrary  course 
would  prove  most  costly  and  unwise. 

Economic  Co-ordination 
It  is,  however,  vitally  essential  that  the  transportation  units 
of  the  country  be  properly  co-ordinated.  By  this  is  meant  not 
the  consolidation  of  all  the  roads,  but  the  relating  of  the  several 
units  so  that  they  will  function  to  the  common  advantage  while 
preserving  their  individual  identity  and  several  operation.  So 
related,  they  would  avoid  destructive  competition  while  stimulat- 
ing a  wholesome  competitive  rivalry,  encouraging  genius  and  ef- 
fective economics,  and  furthering  development  and  progress. 
Properly  adapted  and  applied  this  would  result  in  direct  benefit 
and  profit  to  the  roads,  to  the  employees  and  to  the  entire  indus- 
trial and  commercial  interests  of  the  country.    This  can  be  done. 

Rates 
The  statement  that  "the  sorrect  solution  of  rates  is  to  have 
them  made  by  public  officials"  is  unsound  and  ill  advised.  Shoes 
should  be  made  by  shoemakers  and  rail  rates  by  rail  rate- 
makers  experienced  in  railroading.  Nor  should  they  be  ar- 
rived at  by  compromise,  barter  or  the  mere  ponderance  of  a 
vote.  The  Governmental  administrative  body,  with  examiner 
and  public  service  functions,  should  have  one  or  two  experienced 
rail  rate  men  in  its  body  and  should  see  that  the  making  and 
administration  of  rates  conform  with  the  law.  The  statutes 
should  be  expressed  in  terms  of  principles,  limitations  and  self- 

[S88] 


No.  4]  AN  ENGINEER'S  POINT  OFIVIEW  .  77 

determinate  ratios  and  worded  so  as  to  preadvise  the  roads  what 
their  obligations  and  duties  are.  The  provisions  for  the  public 
service  functions  of  the  administrative  body  should  grant  author- 
ity to  meet  situations,  emergencies  and  needs  which  the  statutes 
fail  to  cover. 

Distribution  of  Revenues 

Much  has  been  said  in  approval  of  the  contingent  fund  plan 
and  the  equalization  of  revenues  as  expressed  in  Section  6  of 
Senate  Bill  3288.  I  am  obliged  to  take  issue  with  the  proponents 
of  these  provisions.  Of  all  the  pending  legislation,  if  enacted 
and  enforced,  this  section,  which  proposes  to  distribute  certain 
earnings  of  profitable  roads  to  the  unprofitable  roads,  would  in 
time  only  wreck  the  transportation  system  of  the  country  and 
cripple  industry  and  commerce.  Roads  now  efficient  would  be- 
come inefficient  and  inefficient  roads  only  less  efficient.  The  sec- 
tion as  it  now  stands  fatally  violates  all  economic  law.  It,  in 
fact,  provides  a  system  of  forcing  accounts  to  meet  deficits — but 
another  sample  of  super-accounting  for  self  and  public  deception. 
It  is  economic  error  to  penalize  efficiency  or  to  put  a  premium  on 
inefficiency.  Experience  teaches  that  what  does  not  conform 
to  economic  law  cannot  endure.     This  is  axiomatic. 

Economic  Solutions 

There  is  a  solution  to  this  problem  and  this  section  of  the  Sen- 
ate bill  can  be  amended  to  conform  to  the  law. 

First.  It  should  provide  for  a  standard  wage  scale,  cost  of 
operation,  rates  and  dividends  in  limitation  of  ratios  and  per- 
centums  as  a  result  of  an  exhaustive  engineering  survey. 

Second.  It  should  provide  a  margin  in  rates  to  meet  fluctua- 
tions, the  balance  resulting  going  to  the  Government  as  a  tax 
and  thus  finally  returning  to  the  consumer. 

Third.  It  should  provide  that  any  savings  or  increased  bal- 
ances resulting  from  any  efficiencies  or  economies  that  shall  be 
effected  shall  be  distributed  one-third  to  the  shareholders  in  the 
form  of  increase  to  dividends ;  one-third  to  the  employees  and 
management,  effecting  the  saving  and  one-third  to  the  Govern- 
ment on  earned  sums  until  such  time  as  it  can  be  applied  in  a 
permanent  reduction  of  rates.  By1  thus  preserving  proper  incen- 
tive for  greater  effort  and  efficiency,  substantial  economies  will 
be  encouraged  and  inventive  genius  stimulated.  This  is  good 
business. 

[589] 


78  RAILROAD  LEGISLATION  [Vol.  Vm 

Plans  to  Refinance 

It  has  been  stated  here  by  a  gentleman  who  stands  high  in 
financial  circles  that  "the  $6,000,000,000  needed  to  refinance 
the  railroads  of  the  country  cannot  be  raised  by  any  conceivable 
plan."  In  taking  issue  with  the  speaker,  I  wish  to  state  that  I 
might  refer  him  to  half  a  dozen  or  more  gentlemen  who  can  pro- 
vide a  suitable  plan  for  this  accomplishment  and  that  my  own 
work  on  this  problem  some  months  ago  crystallized  in  the  con- 
crete form  of  an  outline  and  chart,  which  I  am  able  to  state  is 
well  adapted  effectively  to  finance  the  railroads  on  a  safe  and 
sound  basis  and  impart  a  high  standard  of  security  to  their 
paper. 

Arbitration 

The  provision  in  pending  legislation  looking  to  make  arbitra- 
tion compulsory  is  both  amusing  and  unwise.  Unwise  because 
it  will  not  work.  Amusing  because  it  is  just  the  opposite  from 
what  it  should  be.  The  act  should  specifically  provide  that  no 
rates,  no  wage  scales,  no  time  schedules  and  no  operating  factors 
shall  be  or  become  a  subject  for  arbitration  or  bargaining.  That 
these  elements  shall  be  fixed  only  as  the  result  of  exact,  scientific 
determinations  of  accurate  and  thorough  surveys  made  by  a 
competent  staff  of  engineers  constituted  for  that  purpose.  It  is 
time  we  removed  the  solution  of  these  problems  from  the  realm 
of  guess  work,  bargaining,  barter  and  compromise.  When  we 
do  so,  all  individuals  and  groups  concerned  will  profit  most 
greatly. 

Present  Needs 

What  the  railroads  need  is  not  copious  legislation  and  mul- 
tiplicity of  boards,  but  rather  the  enactment  of  a  few  simple 
measures  and  some  good  straight  work  by  those  who  will  untie 
their  knots  and  map  out  the  working  details  of  plans  that  will 
carry  into  effective  operation  the  proper  relating  of  their  several 
activities. 

Conclusions 
In  conclusion  I  wish  to  urge  that  the  pending  bills  and  legisla- 
tion be  amended  before  enactment  in  line  with  these  suggestions, 
— and  that  steps  be  taken  by  those  in  a  position  to  act,  to  form 
and  provide  for  a  staff  of  engineers  and  experienced  railroad  men 
who  shall  take  up  the  solution  of  these  problems  and  work  out 
detailed  plans  to  carry  solutions  into  effective  operation. 

[590] 


THE  REGULATION  OF  WATER  CARRIERS 

R.  A.  HISCANO 
General  Manager,  Catskill  Evening  Line,  New  York 

IN  the  past  three  years  there  has  been  considerable  attention 
directed  to  our  waterways,  and  this  is  due  to  the  growing  re- 
alization of  the  need  for  additional  transportation  facilities. 
Recent  experience  has  plainly  indicated  that  the  railroads  of  the 
country  can  not  entirely  take  care  of  the  country's  traffic,  and  for . 
many  reasons  extension  of  the  railroad  systems  is  not  possible, 
particularly  in  the  more  densely  settled  sections  of  the  United 
States.  We  then  come  to  the  question  of  what  can  the  water  lines 
do  to  furnish  the  additional  means  of  satisfactorily  handling  the 
country's  tonnage. 

In  order  to  form  some  basis  for  the  plan  of  the  more  inten- 
sive use  of  the  rivers,  lakes  and  canals  of  the  United  States  it  is 
necessary  to  consider  the  position  the  water  lines  occupied  sixty 
years  or  more  ago.  At  that  period  the  bulk  of  the  tonnage  was 
shipped  by  water  and  the  rail  lines  were  not  the  mainstay  of  the 
shipping  or  traveling  public.  As  you  all  know,  gradually  the 
railroads  extended  and  as  they  grew  the  water  lines  declined. 
Now  many  reasons  have  been  advanced  which  explain  why  the 
waterways  each  year  continued  to  be  less  and  less  used,  but 
I  think  the  first  and  most  important  cause  was  the  smaller  scale 
on  which  a  navigation  company  was  operated.  It  was  usually  an 
individual  organization  dominated  by  one  man  whose  financial 
means  were  necessarily  limited.  In  fact,  this  condition  still  ex- 
ists today  to  a  great  extent.  Now  a  one  man  company  could  not 
always  keep  abreast  of  times  and  so,  when  the  equipment  wore 
out,  no  attempt  was  made  to  renew  it  or  to  continue  the  service. 

Gradually  as  the  water  lines  in  a  section  retired,  others  were 
discouraged  from  attempting  to  enter  the  field.  The  second 
reason  was  the  unceasing  warfare  waged  by  the  railroads,  who, 
with  their  extensive  organizations,  were  able  by  cut-throat  rates, 
competing  service,  rebates,  etc.,  to  <force  those  lines  out  which 
could  otherwise  have  continued  in  business. 

This  is  of  course,  all  a  matter  of  history  now,  and  by  reason 
of  national  laws  and  public  opinion,  the  existing  water  lines  now 
have  a  better  opportunity  to  conduct  their  business.     The  prob- 

[S91] 


80  RAILROAD  LEGISLATION  [Vol.  VHI 

lem  of  to-day  is  to  restore  to  our  rivers  and  canals  the  service 
which  is  required  and  those  who  have  studied  the  question,  think 
that  some  of  the  f olowing  ideas  should  be  adopted : 

First,  discourage  Congress  from  enacting  any  additional  legis- 
lation which  will  have  a  tendency  to  drive  the  water  lines  from 
business.  For  example,  the  Esch  Bill  recently  introduced  in  the 
House  of  Representatives  originally  contained  a  provision  to 
place  the  water  lines  completely  under  the  jurisdiction  of  the 
Interstate  Commerce  Commission.  Only  the  strongest  kind  of 
protests  filed  by  shippers,  commercial  organizations,  and  naviga- 
tion companies  were  successful  at  the  last  minute  in  having  this 
feature  eliminated  from  the  bill.  Another  point,  the  existing  In- 
terstate Commerce  Act  has  been  construed  by  the  Interstate 
Commerce  Commission  to  give  the  commission  authority  to  pre- 
scribe the  form  of  bill  of  lading  issued  by  navigation  companies, 
although  such  jurisdiction  and  order  would  annul  the  provision 
of  the  Harter  Act  and  other  legislation  expressly  enacted  to 
protect  the  water  lines  because  of  the  greater  hazard  they  en- 
counter in  the  conduct  of  their  business.  If  the  United  States 
Supreme  Court  upholds  the  commission,  then  Congress  should 
amend  the  law  so  as  to  deprive  the  Commission  of  such  authority 
in  this  particular. 

Secondly.  Congress  should  on  the  other  hand  pass  such  legis- 
lation as  will  compel  a  railroad  company  to  extend  to  a  con- 
necting water  carrier  the  same  division  of  through  rates,  or  ter- 
minal facilities,  or  share  of  unrouted  traffic  as  is  given  to  a  con- 
necting railway  line,  all  conditions  being  equal.  However,  the 
originating  rail  carrier  should  not  be  compelled  to  take  a  lower 
division  than  the  rail  competitor  of  the  water  line  would  allow 
it,  or  that  the  originating  rail  carrier  should  give  a  greater  share 
of  unrouted  traffic  than  the  boat  line  turned  over  to  it.  To  illus- 
trate the  reason  for  this  proposed  law,  I  wish  to  point  out  that 
the  port  to  port  local  traffic  of  a  water  line  is  not  usually  sufficient 
to  make  operation  of  the  line  profitable,  and  a  certain  amount  of 
through  or  joint  rail  and  water  freight  is  needed.  Now  the 
present  practice  is  for  the  powerful  railroads  to  allow  the  small- 
est division  of  joint  rates  they  can  be  forced  to  give,  with  the  re- 
sult the  navigation  companies  can  not  earn  sufficient  to  pay  even 
the  handling  charges  on  the  through  freight,  and  they  therefore 
do  not  encourage  the  business.  On  the  other  hand  where  two 
connecting  rail  lines  join  in  through  rates  the  divisions  are  ar- 

[592] 


No.  4]  THE  REGULATION  OF  WATER  CARRIERS  81 

ranged  on  the  basis  of  the  actual  mileage  the  goods  travel  over 
each  company.  The  country  demands  that  more  through  rail 
and  water  routes  be  established  and  so  far  as  the  water  lines  are 
concerned,  they  are  anxious  to  meet  the  demand,  but  they  can 
not  do  so  if  they  have  to  carry  the  traffic  at  a  dead  loss. 

It  may  be  interesting  to  know  that  early  in  this  year  the  Di- 
rector General  of  the  United  States  Railroad  Administration 
announced  to  a  committee  of  Congress  that  he  was  in  accord  with 
this  plan  of  more  through  water  and  rail  routes,  and  a  commit- 
tee of  water  lines  officials  immediately  communicated  with  him 
and  stated  that  if  he  meant  what  he  said  they  were  willing  to 
join  him.  Well,  there  were  several  conferences  and  the  water 
lines  filed  their  briefs  and  exhibits,  but  here  it  is  nearly  the  end 
of  the  year  and  nothing  whatever  has  been  accomplished. 

I  have  only  one  more  idea  to  suggest  before  I  conclude  and 
that  is  this;  the  financial  and  banking  interests  can  assist  mate- 
rially in  the  movement  to  revive  the  use  of  our  inland  waterways 
by  helping  to  finance  legitimate  and  sound  proposals  put  forward 
by  navigation  companies.  There  seems  to  be  no  difficulty  to  get 
financial  support  for  all  the  new  deep-sea  steamship  companies 
which  are  being  organized  to  sail  from  here  to  the  ports  of  the 
world.  Why  should  our  domestic  needs  be  ignored?  Just  look 
at  the  splendid  New  York  State  Barge  Canal  recently  constructed 
at  a  cost  of  over  one  hundred  and  fifty  million  dollars  waiting  to 
be  made  use  of.  Its  capacity  is  estimated  at  ten  million  tons 
yearly,  and  last  year  there  was  barely  one  million  tons  shipped 
through  it,  due  entirely  to  the  lack  of  navigation  companies. 
What  that  waterway  needs  to  make  it  serve  the  purpose  for  which 
it  was  constructed  is  a  corporation  with  about  twenty  millions  of 
dollars  capital  to  furnish  the  same  kind  of  freight  service  that 
the  rail  lines  paralleling  it  offer  the  public.  This  would  not  be 
injuring  the  railroads  for  there  is  enough  business  for  both 
classes  of  service. 

[S93] 


THE  RAILROADS  AND  THE  INVESTOR 

THOMAS  REED  POWELL 
Associate  Professor  of  Constitutional  Law,  Columbia  University 

THE  lesson  for  the  day  is  "The  Railroads  and  the  Investor." 
As  money  makes  the  mare  go,  so  it  does  the  railroads. 
Money  from  freights  and  fares  will  run  the  roads  after 
they  are  built.  But  the  roads  must  be  built  before  they  can  be 
run.  Expenditures  for  initial  construction  and  capital  outlays  for 
extensions  cannot  be  squeezed  from  shippers  and  passengers. 
They  must  be  obtained  from  investors  or  from  the  government. 
There  are  but  two  ways  of  securing  the  necessary  capital  for  the 
railroads.  One  is  coercion;  the  other  is  seduction.  If  the  gov- 
ernment chooses  to  finance  the  roads,  it  may  use  both  coercion 
and  seduction.  It  can  tax  and  it  can  borrow.  If,  on  the  other 
hand,  we  are  to  finance  the  roads  through  private  investment, 
our  only  recourse  is  to  the  arts  of  seduction.  We  must  persuade 
those  who  have  money  that  it  is  worth  their  while  to  become 
stockholders  or  creditors  of  the  corporations  which  own  the 
roads.  Whether  persons  with  money  will  care  to  put  it  to  the 
use  of  the  railroads  will  depend  upon  what  they  can  look  for  by 
way  of  interest  or  dividends  as  compared  with  what  they  can 
hope  to  get  if  they  put  their  money  elsewhere. 

The  gentlemen  who  are  to  address  us  this  afternoon  are  to  tell 
us  what  seductions  we  must  practice  on  investors  to  prevail  upon 
them  to  put  their  money  into  railroad  stocks  and  bonds.  This 
may  not  be  the  precise  point  to  which  their  remarks  are  directly 
addressed ;  but  it  is  a  point  on  which  all  their  remarks  must  bear. 
For  the  treatment  accorded  to  those  who  have  already  put  their 
money  into  railroads  has  art  important  relation  to  the  seduction 
of  those  whose  further  aid  the  road  must  have.  If  past  investors 
are  dissatisfied,  future  investors  will  insist  on  inducements  more 
alluring. 

The  interests  of  past  investors  are  supposed  to  be  protected  by 
the  courts.  Legislatures  and  commissions  may  limit  the  returns 
of  investors  by  limiting  fares  and  freights.  But  there  is  a  limit 
to  this  limitation.  The  courts  require  that  the  fares  and  freights 
be  left  high  enough  so  that  the  roads  earn  what  is  called  a  fair 
return  on  their  fair  value.     Perhaps  we  may  learn  this  afternoon 

[594] 


No.  4]  THE  RAILROADS  AND  THE  INVESTOR  83 

what  this  so-called  "fair  value"  is;  but  up  to  the  present  moment, 
nobody  knows.  It  can't  be  what  the  roads  would  be  worth  if 
their  rates  were  not  subject  to  regulation,  for  this  would  defeat 
the  undeniable  power  to  regulate.  It  isn't  what  the  roads  actually 
cost,  and  it  isn't  exactly  what  it  would  cost  to  build  them  now  in 
their  present  partly  worn-out  condition,  though  it  squints  a  good 
deal  in  this  latter  direction.  The  courts  have  been  more  explicit 
in  telling  what  fair  value  is  not,  than  in  saying  what  it  is.  What- 
ever it  is,  it  is  some  combination  of  incongruities,  some  com- 
promise of  competing  inconsistencies. 

The  judicial  treatment  of  the  problem  has  been  woefully  arti- 
ficial. With  an  animism  which  reminds  us  of  the  days  of  the- 
deodand,  the  courts  have  talked  as  though  what  was  being  regu- 
lated was  the  roads  themselves,  the  physical  equipment  of  ties 
and  track  and  rolling  stock.  Plainly  a  realistic  approach  to  the 
problem  would  have  recognized  that  regulation  affects  persons, 
not  things.  The  parties  in  interest  are  the  shippers  and  pas- 
sengers on  the  one  hand,  and  the  stockholders  and  bondholders 
on  the  other.  Plainly,  too,  the  situations  of  the  stockholders  and 
bondholders  are  not  the  same.  The  bondholders  have  contracted 
for  an  agreed  rate  of  return.  The  stockholders  have  taken  a 
chance.  Yet  the  return  to  which  the  court  refers  is  a  return  to 
the  road,  not  to  the  persons  interested  in  the  road.  The  road  must 
have  a  fair  return  on  its  fair  value.  The  bondholders  then  get 
the  return  they  have  contracted  for ;  the  stockholders  get  the  rest. 
Thus  where  a  road  is  financed  largely  by  bonds  bearing  interest 
at  a  lower  rate  than  that  allowed  to  the  road  as  a  fair  return  on 
its  fair  value,  the  rate  of  return  for  the  road  gives  but  an  im- 
perfect index  of  the  rate  of  return  enjoyed  on  the  stockholder's 
investment.  Yet  it  is  that  investment  which  is  affected  by  rate 
regulation  and  which  ought  to  be  the  primary  object  of  judicial 
attention  as  it  is  necessarily  the  primary  object  of  judicial 
concern. 

The  courts  have  been  much  more  certain  about  what  is  a  fair 
return  than  about  what  is  fair  value.  Until  very  recently  they 
have  regarded  six  per  cent  as  a  fair  return  and  have  sometimes 
approved  of  less.  They  seem  to  have  been  guided  by  the  normal 
rate  of  interest  on  money  loaned  rather  than  the  normal  rate  of 
income  from  business.  Yet,  from  the  stockholder's  standpoint, 
the  railroad  enterprise  is  a  business,  subject  to  the  fluctuations 
which  other  businesses   must    face.     Investors   would   not  put 

[595] 


84  RAILROAD  LEGISLATION  [Vol.  VIII 

money  into  railroad  stock  with  no  hope  of  getting  more  than  six 
per  cent  and  no  guarantee  of  getting  that,  when  they  could  put 
it  into  other  businesses  where  the  risk  is  no  greater  and  the 
returns  are  not  subject  to  legal  limitation. 

Undoubtedly  some  of  the  artificialities  of  which  the  courts  have 
been  guilty  tend  to  counterbalance  each  other.  This  is  true  of 
the  failure  to  note  the  relevance  of  the  ratio  between  bonds  and 
stock  and  the  fixing  of  the  rate  of  fair  return  at  the  normal 
interest  rate  on  money  loaned.  Six  per  cent  on  the  fair  value  of 
the  road  may  mean  more  than  six  per  cent  for  the  stockholders 
and  so  tend  to  put  their  investment  on  a  par  with  those  in  other 
businesses.  So  also  the  rather  rigid  limitation  on  the  rate  of 
return  may  be  offset  by  the  liberality  displayed  in  the  judicial 
guessing  as  to  fair  value.  And  results  which  might  seem  to  be  a 
formal  injustice  to  stockholders  may  be  formal  only  and  not 
substantial,  by  reason  of  the  circumstances  under  which  the 
stock  was  acquired. 

Another  element  to  be  considered  is  that  rate  regulation  must 
often  fail  to  depress  the  rates  to  the  lowest  point  that  would 
pass  muster  with  the  courts.  Governmental  regulation  of  rail- 
roads rides  two  horses  that  often  go  in  different  directions.  We 
wish  rates  to  be  reasonable ;  we  desire  them  also  to  be  propor- 
tional. So  long  as  our  test  of  reasonable  is  based  largely  on  the 
financial  results  to  the  roads,  it  must  follow  that  a  schedule  of 
rates  which  would  be  reasonable  for  one  road  would  be  too  high 
or  two  low  for  others.  If  we  should  reduce  the  rates  on  the 
favorably-situated  roads  to  the  lowest  point  which  will  yield 
them  a  fair  return  on  their  fair  value,  their  less  favorably 
situated  competitors  could  not  do  business  unless  their  rates  were 
equally  low.  And  by  hypothesis  this  would  leave  them  less  than 
a  fair  return.  That  such  indirect  results  of  lawful  regulation 
of  the  stronger  roads  would,  never  be  regarded  as  an  unconsti- 
tutional taking  of  the  property  of  the  weaker  roads  must  be 
practically  certain.  Nevertheless  it  is  a  misfortune  which  we 
have  not  thus  far  sought  to  put  upon  the  weaker  roads.  We 
have  dealt  with  groups  of  carriers  rather  than  with  individual 
roads.  Thus  it  must  happen  that  the  stronger  roads  have  not 
been  restricted  to  the  lowest  rates  that  the  courts  would  sanction. 
This  is  nice  for  the  stockholders,  but  not  so  nice  for  shippers  and 
passengers.  Here  is  a  problem  still  awaiting  a  satisfactory  so- 
lution. 

[S96] 


No.  4]  THE  RAILROADS  AND  THE  INVESTOR  85 

Enough  has  been  said  to  indicate  how  far  our  existing  methods 
of  control  fail  to  deal  realistically  with  the  competing  interests 
of  the  carriers  and  their  patrons.    What  the  results  have  actually 
been  or  what  they  are  likely  to  be  cannot  be  known  by  one  whose 
reading  had  been  largely  confined  to  judicial  opinions.     By  and 
large  the  courts  seem  to  have  tried  to  protect  railroad  property 
in  such  enhancements  of  value  as  are  enjoyed  by  property  de- 
voted to  other  uses.    As  it  is  the  monopoly  position  of  the  roads 
which  gives  rise  to  governmental  limitation  of  their  charges,  so 
the  primary  purpose  of  rate  regulation  would  seem  to  be  the  pre- 
vention of  exactions  that  are  rendered  possible  only  by   such 
monopoly  position.     If  we  mean  to  go  further  and  prevent  the 
enhancement  which  other  property  is  still  allowed  to  enjoy,  we 
can  hardly  expect  persons  to  put  their  money  into   regulated 
enterprises,  so  long  as  unregulated  enterprises  compete   for  it. 
If  we  plan  to  deny  the  prospect  of  any  unearned  increment,  we 
must  certainly  offer  security  against  decrement.     If  we  are  to 
seduce  investors  to  put  their  money  into  railroads,  we  must  meet 
the  seductions  offered  by  other  businesses.     The  courts  seem  to 
have  had  this  necessity  vaguely  in  mind,  and  to  have  intended 
to  thwart  the  rate  regulation  that  would  deter  investors.    If  their 
handling  of  the  problem  has  been  unsatisfactory,  it  is  due  in  con- 
siderable part  to  the  way  in  which  the  task  has  been  put  upon 
them.     Our  legislatures  and  commissions  have  dodged  the  genu- 
ine issues  in  the  situation  and  have  felt  their  way  timidly  and 
compelled  the  courts  to  grope  in  darkness. 

The  topic  of  this  afternoon  recognizes  that  the  genuine  issue 
is  one  of  returns  to  investors  so  long  as  the  roads  continue  to  be 
financed  by  private  investment.  The  approach  to  the  railroad 
problem  from  the  investor's  angle  is  essential,  whether  we  con- 
tinue existing  methods  of  governmental  control  or  devise  new 
ones.  An  understanding  of  the  investor's  position  is  a  necessary 
prerequisite  to  a  decision  whether  we  shall  continue  existing 
methods  or  devise  new  ones,  and,  if  the  latter,  to  the  choice  be- 
tween the  various  expedients  open  to  us.  If  we  are  to  stick  to 
some  form  of  seduction  of  investors,  we  must  know  how  much 
seduction  is  necessary  to  get  the  desired  results.  If  investors 
prove  too  coy,  we  shall  know  that  we  must  try  coercion.  Co- 
ercion means  in  the  long  run  the  raising  of  funds  by  taxation  or 
else  the  very  exaction  on  shippers  that  regulation  seeks  to  prevent. 
Coercion  leads  to  governmental  guarantees  if  not  to  government 

[597] 


86  RAILROAD  LEGISLATION  [Vol.  VIII 

ownership.  Thus  the  problem  of  the  investor  and  the  problem 
of  the  public  touch  each  other.  The  public  must  satisfy  the 
investor  if  it  wishes  him  to  continue  to  invest.  The  investor 
must  not  demand  too  much  of  the  public  if  he  wishes  the  oppor- 
tunity to  invest.  Thus  the  papers  of  this  afternoon's  session, 
though  concerned  with  the  railroad  problem  primarily  from  the 
standpoint  of  the  present  owners  of  railway  securities,  necessarily 
will  throw  light,  on  the  larger  public  issues  which  existing  condi- 
tions force  on  our  attention. 


[S98] 


THE  REVENUE  NEEDS  OF  THE  RAILROADS 

HOWARD  ELLIOTT 
President  Northern  Pacific  Railway  Company 

Y.OU  have  complimented  me  by  asking  me  to  appear  before 
you,  and  I  wish  to  take  your  time  for  a  few  moments  to 
discuss  one  vital  part  of  the  railroad  question,  namely, 
"The  Revenue  Needs  of  the  Railroads." 

There  are  so  many  features  of  the  present  railroad  situation 
that  a  proper  discussion  of  the  whole  subject  would  take  many 
days. 

As  you  know,  the  Congress,  through  committees,  has  been  dis- 
cussing railroad  legislation  all  this  year  and  has  not  yet  been 
able  to  come  to  a  conclusion.  It  seems  quite  clear,  however, 
that  these  committees  reflect  the  views  of  the  people  that  they 
do  not  wish  government  ownership  or  government  control  any 
longer  than  is  absolutely  necessary.  This  makes  it  all  the  more 
necessary  to  treat  the  furnishing  of  transportation  as  a  business 
function  and  to  permit  the  railroads  to  become  self-supporting 
as  business  enterprises. 

This  great  American  railroad  system  of  260,000  miles,  serv- 
ing 105,000,000  people,  is  to  the  nation  on  a  large  scale  what  the 
farmer's  oxen  are  to  him  and  the  rural  mail  carrier's  horses  are 
to  him.  Just  as  their  oxen  and  horses  must  be  nourished  and 
kept  in  good  condition  to  do  their  work,  so  must  the  railroads 
be  nourished  and  kept  in  a  sound  condition  if  the  nation  is  to 
grow  and  our  wonderful  resources  be  conserved  and  developed, 
and  our  great  future  wisely  and  thoroughly  protected. 

Prior  to  Government  control  the  railroad  executives  realized 
that  in  the  face  of  a  growing  volume  of  business,  the  increases 
in  wages  and  other  costs,  and  the  complications  of  the  business 
were  such  that  this  great  transportation  machine  was  not  receiv- 
ing sufficient  nourishment  to  keep  it  adequate  in  all  of  its  parts 
for  the  needs  of  the  country.  f 

Earnest  efforts  were  made  from  time  to  time  to  obtain  general 
increases  in  rates,  not  simply  in  the  interest  of  the  bondholders 
and  stockholders,  but  in  the  interest  of  the  people  as  a  whole  so 
that  they  would  be  encouraged  to  put  part  of  their  great  annual 

[599] 


88  RAILROAD  LEGISLATION  [Vol.  VIII 

savings  into  the  railroad  business  in  order  that  the  transportation 
machine  would  be  at  all  times  "ready  to  serve."  An  application 
for  a  15  per  cent  increase  in  freight  rates  was  made  by  the  East- 
ern roads  in  1917,  and  was  not  finally  disposed  of  when  the 
President  thought  the  war  conditions  made  it  necessary  for  him 
to  take  possession  of  the  roads,  which  he  did  on  December  28, 
1917. 
The  President  said  to  Congress  on  January  4,  1918: 

While  the  present  authority  of  the  Executive  suffices  for  all  purposes 
of  administration,  and  while,  of  course,  all  private  interests  must  for  the 
present  give  way  to  public  necessity,  it  is,  I  am  sure  you  will  agree  with 
me,  right  and  necessary  that  the  owners  and  creditors  of  the  railways,  the 
holders  of  their  stocks  and  bonds,  should  receive  from  the  Government 
an  unqualified  guarantee  that  their  properties  will  be  maintained  through- 
out the  period  of  federal  control  in  as  good  repair  and  as  complete  equip- 
ment as  at  present,  and  that  the  several  roads  will  receive  under  federal 
management  such  compensation  as  is  equitable  and  just  alike  to  their 
owners  and  to  the  general  public.  I  would  suggest  the  average  net  rail- 
way operating  income  of  the  three  years  ending  June  30,  1917.  I  earnestly 
recommend  that  these  guarantees  be  given  by  appropriate  legislation,  and 
given  as  promptly  as  circumstances  permit. 

The  fiscal  year  ended  June  30,  1915,  was  a  poor  year;  that 

ended  June  30,  1916,  a  medium  year;  and  that  ended  June  30, 

1917,  a  fairly  good  year,  and  the  average  net  operating  income 
for  the  three  years,  generally  known  as  the  "standard  return" 
was  approximately  $935,000,000.  This  was  the  Government's 
measure  of  the  net  earning  power  of  the  railroad  system  of  the 
country  at  that  time. 

The  Secretary  of  the  Treasury  was  made  Director  General 
and  the  United  States  Railroad  Administration  began  to  organize 
all  departments.  They  found  very  shortly  that  the  revenues  to 
be  received  from  the  existing  rates  were  not  sufficient  to  meet 
the  growing  expenses,  and  this  subject  received  very  careful  con- 
sideration. In  other  words,  the  administration  took  the  business- 
like attitude  of  trying  to  manage  the  railroads  as  a  whole  so  that 
both  ends  would  meet. 

The  Interstate  Commerce  Commission  had  granted  to  the  East- 
ern railroads  in  the  summer  of  1917  about  half  of  the  15  per 
cent  increase  asked  for,  and  granted  the  remainder  on  March  15, 

1918,  after  the  roads  had  passed  under  the  control  of  the  govern- 
ment. The  amount,  however,  was  entirely  insufficient  to  meet 
the  rising  tide  of  expenses,  and  on  June  10,  1918,  the  Director 
General  made  passenger  rates  3c.  a  mile  instead  of  2c.  and  2^c. 
that  were  in  effect  in  many  places  as  the  result  of  state  laws,  and 
on  June  25,  1918,  increased  freight  rates  about  25  per  cent. 

[600] 


No.  4]  THE  REVENUE  NEEDS  OF  THE  RAILROADS  89 

The  administration  naturally  hoped  that  these  increases  in 
rates,  together  with  economies  that  it  expected  would  result 
from  unified  operation,  would  take  care  of  the  situation  and  that 
there  would  be  sufficient  earnings  to  pay  expenses,  taxes,  and 
the  standard  return  to  the  owners. 

Before  the  Senate  Committee  on  January  3,  1919,  the  Director 
General  testified  that  he  felt  the  results  for  1919  would  produce 
a  surplus  of  $100,000,000  to  the  government  over  all  requirements, 
as  follows : 

Senator  Cummins :  Then,  do  you  propose,  in  order  to  meet  the  situa- 
tion, that  there  shall  be  another  increase  in  rates? 

Director  General  McAdoo :  Not  at  all,  Senator.  On  precisely  the  same' 
basis  as  now  exists  as  to  rates,  wages  and  costs  of  materials  and  operation, 
I  think  we  should  have  a  surplus  of  $100,000,000  for  1919. 

In  other  words,  the  United  States  Railroad  Administration 
took  the  very  proper  view  of  the  situation  that  there  should  be 
earnings  enough  to  meet  all  obligations.  This  policy  adopted  by 
the  government  at  that  time  seems  a  sound  one  and  better  for 
the  American  people,  in  the  long  run,  than  to  turn  constantly 
to  the  national  treasury  and  ask  it  to  make  up  any  deficiency 
in  revenue.  The  latter  plan  tends  to  check  initiative,  reduces 
energy  and  economy,  and  encourages  waste.  It  is  a  policy  that, 
in  the  long  run,  will  make  the  total  transportation  bill  of  the 
people  made  up  of  such  rates  as  they  may  pay  in  the  first  in- 
stance, plus  taxes  to  replenish  the  treasury,  greater  than  if  the 
rate  is  adjusted  to  the  service  and  every  incentive  to  economy 
and  energy  is  preserved. 

The  net  operating  income  for  the  first  year  of  government 
operation  failed  to  meet  the  standard  return  by  approximately 
$235,000,000.  This  was  in  spite  of  the  very  earnest,  sincere  and 
hard  work  of  the  Director  General  and  all  of  his  assistants.  In 
that  first  year  the  new  rates  were  not  effective  for  the  entire 
period.  There  was  a  very  serious  winter  in  parts  of  the  country, 
and  war  conditions  were  most  onerous  and  difficult  so  that  the 
federal  administration  had  unusual  conditions  to  deal  with.  It 
is,  therefore,  fair  to  say  that  1918  should  not  be  taken  as  a  meas- 
ure of  the  results  under  the  new  rates  inaugurated  by  the  gov- 
ernment and  under  the  wage  scales  that  it  was  necessary  to  pay 
because  of  these  conditions. 

Figures  are  now  ready  for  part  of  1919,  and  a  fair  estimate 
can  be  made  for  the  balance  of  the  year.  The  Director  General 
had  hoped  that  income  would  be  sufficient  to  meet  all  outgo,  but 

[601] 


90  RAILROAD  LEGISLATION  [Vol.  VIII 

the  results  are  disappointing.  The  figures  for  the  nine  months, 
for  Class  I  roads  (earning  $1,000,000  or  over)  show  that  the 
proportion  of  the  standard  return  for  that  period  has  not  been 
met  by  $245,000,000.  During  the  months  of  July,  August  and 
September  the  roads  have  just  about  earned  the  standard  re- 
turn, and  possibly  in  October  they  may  do  the  same,  but  there  is 
every  indication  that  the  year  will  end  with  a  substantial  deficit, 
perhaps  $350,000,000  for  all  railroad  operations. 

We  have  at  oar  doors  in  New  England  an  impressive  example 
of  the  utter  inadequacy  of  revenues.  For  the  five  months  ended 
September  30,  1919,  which  are  very  good  months  in  New  Eng- 
land, as  to  weather  and  operating  conditions  and  as  to  volume 
of  business,  because  the  great  summer  travel  is  at  its  height,  the 
New  England  roads  failed  to  earn  the  standard  return  for  that 
proportion  of  the  year,  namely  $15,908,320,  by  $6,630,658,  or 
41.7  per  cent. 

This  group  of  roads  is  in  the  most  serious  condition  and  must 
receive  aid  from  increased  rates  and  earnings  as  soon  as  gov- 
ernment control  and  the  standard  return  cease,  if  they  are  to 
survive  and  serve  the  public. 

The  roads  north  of  the  Ohio  River  and  east  of  the  Mississippi 
are  also  in  a  very  critical  condition.  South  of  the  Ohio  and  west 
of  the  Mississippi  River  the  conditions  are  a  little  better,  but 
they  are  not  good  anywhere. 

For  the  country  as  a  whole,  the  net  operating  income  is  only 
62  per  cent,  of  the  standard  return  (for  Class  I  roads)  for  the 
nine  months  ended  September  30,  1919. 

Senator  Cummins,  in  his  report  to  the  Senate,  dated  Novem- 
ber 10,  1919,  in  commenting  upon  estimates  of  deficits,  says : 

It  is  the  opinion  of  the  Committee,  without  reflecting  in  any  wise  upon 
the  Railroad  Administration,  that  in  the  end  the  loss  will  be  found  to  be 
much  greater  than  the  estimates-  submitted. 

These  deficits  must  be  considered  in  any  forecast  of  future  re- 
quirements, and,  in  addition,  there  are  other  elements  to  be  taken 
into  account. 

Because  of  the  difficulties  in  obtaining  men  and  material,  due 
to  the  war,  not  as  much  work  has  been  done  on  the  equipment  of 
the  roads,  especially  the  freight  cars,  as  is  necessary  to  keep 
them  up  to  that  standard  which  the  needs  of  American  commerce 
demand. 

Nor  have  there  been  placed  in  the  tracks  of  many  of  the 

[602] 


No.  4]  THE  REVENUE  NEEDS  OF  THE  RAILROADS  91 

roads  sufficient  rails  and  ties,  as  is  necessary  for  the  best  health 
of  the  property,  and  there  have  been  some  failures  to  do  work 
of  other  kinds  because  of  the  conditions  as  to  men  and  material. 

The  money  necessary  to  bring  the  condition  of  the  present 
properties  to  a  higher  standard  must  be  spent  in  the  next  few 
years  and  is  an  element  in  considering  the  revenue  needs  of  the 
railroads.  This  amount  cannot  to-day  be  stated  exactly,  but  it 
will  be  several  hundred  millions  of  dollars. 

Again,  there  are  some  increases  in  expenses  to  be  met  in  1920 
which  were  not  effective  for  the  full  year  1919,  such  as  the  re- 
cent change  in  rates  of  wages  and  rules  for  men  working  in- 
shops,  estimated  at  about  $50,000,000  a  year.  Other  increases 
in  wages  may  have  to  be  made,  and  these  will  be  an  important 
element  in  the  problem. 

There  is  also  the  probability  that  as  a  result  of  the  recent  coal 
strike,  fuel  will  cost  more  in  1920  than  it  did  in  1919.  The  rail- 
roads' coal  bill  to-day  is  running  at  the  rate  of  at  least  $300,- 
000,000  a  year,  and  prior  to  the  war  was  about  $225,000,000. 

Then  the  world-wide  demand  for  steel,  lumber  and  all  mate- 
rials for  reconstruction  work  and  for  doing  work  that  has  been 
postponed  or  suspended  since  1914  means  that  there  will  prob- 
ably be  no  decrease  in  the  prices  of  these  important  elements 
in  the  railroad  expense  account,  and  there  may  be  an  increase. 

Additional  payments  must  also  be  made  for  new  capital  to  be 
used  for  increasing  the  capacity  of  the  roads  to  serve  the  pub- 
lic. For  fiive  years  prior  to  the  war  the  expansion  of  the  roads 
was  not  rapid  enough  to  meet  the  needs  of  the  country,  and  dur- 
ing the  war  period  even  less  has  been  accomplished. 

It  is  not  too  much  to  say  that  for  new  equipment,  with  the 
necessary  shops  and  tools  to  keep  it  in  order,  there  should  be 
spent  within  the  next  few  years  $3,000,000,000,  and,  no  doubt, 
an  equal  amount  for  tracks,  terminals,  electrification  and  other 
facilities  to  make  the  transportation  machine  equal  to  the  de- 
mands of  the  country,  if  growth  is  to  continue. 

The  increased  expenses  of  states,  counties  and  municipalities, 
because  of  higher  wages,  is  being  reflected  in  a  constantly  in- 
creased tax  rate,  and  this  also  must  be  taken  into  account  when 
considering  "The  Revenue  Needs  of  the  Railroads." 

In  1910  the  taxes  paid  by  the  railroads  of  the  United  States 
were  $103,000,000,  and  for  1919  the  total  taxes  will  be  approxi- 
mately $250,000,000. 

[603] 


92  RAILROAD  LEGISLATION  [Vol.  VIII 

To  offset  this  in  part  private  management  may  be  able  to 
have  more  intensive  supervision,  develop  a  greater  spirit  of 
energy,  and  a  finer  esprit  de  corps  upon  individual  properties 
which  will  tend  to  prevent  further  increases  in  expenses,  and,  in 
due  time,  I  hope,  bring  about  some  reductions. 

I  think  all  will  admit  that  long  distance  management  of  indus- 
trial enterprises  is  not  so  efficient  or  so  economical  as  where 
there  is  close,  local,  authoritative  and  responsible  supervision 
and  enthusiastic  leadership. 

There  is  every  reason  now  to  expect  that  the  roads  will  be 
returned  to  the  owners  on  January  1.  It  is  hoped  some  legisla- 
tion before  that  date  will  be  passed  that  will  protect  the  situation 
until  the  necessary  readjustments  between  income  and  outgo 
can  be  made  and  the  earning  power  of  the  roads  restored.  Even 
before  the  war  the  net  earnings  of  the  roads  were  not  sufficient 
to  attract  the  new  capital  needed  each  year,  and  these  net  earn- 
ings are  even  less  to-day,  although  nearly  $800,000,000  has  been 
spent  in  the  last  two  years  in  adding  to  the  plant,  not  counting 
equipment.  It  is  fair  to  say  that  the  net  earnings  of  the  railroads 
under  present  conditions  are  plainly  inadequate  to  meet  the  ab- 
solute necessities  and  to  provide  at  all  for  the  future. 

The  President  said,  when  he  took  possession  of  the  roads : 

Investors  in  railway  securities  may  rest  assured  that  their  rights  and 
interests  will  be  as  scrupulously  looked  after  by  the  Government  as  they 
could  be  by  the  directors  of  the  several  railway  systems. 

The  railroad  officers  believe  that  it  would  be  a  wise  and  proper 
exercise  of  presidential  power  and  in  the  interest  of  an  adequate 
transportation  machine  for  the  use  of  the  people  for  the  United 
States  Railroad  Administration  to  restore  the  balance  between 
income  and  outgo,  which  can  only  be  done  by  increasing  the  rates. 
The  spirit  of  the  President's  statement  when  he  took  the  roads 
seems  to  justify  such  action.  The  Federal  Administration  has 
the  knowledge,  power  and  ability  to  act  and  can  do  the  work 
more  promptly  than  the  owners,  and  the  influence  of  the  govern- 
ment would  be  much  more  convincing  in  bringing  about  a  proper 
result.  The  President  and  the  Director  General,  however,  have 
decided  otherwise,  and  the  burden  of  obtaining  an  increase  in 
rates  now  rests  upon  the  owners,  who  have  no  other  way  of 
obtaining  revenue.  In  fact,  the  Esch  Bill,  just  introduced,  im- 
poses upon  the  owners  the  burden  of  riling  tariffs  within  60  days 
after  government  control   ceases,   for  any  increases   necessary. 

[604] 


No.  4]  THE  REVENUE  NEEDS  OF  THE  RAILROADS  93 

They  cannot  control  the  prices  for  materials,  nor  can  they  make 
reductions  in  wages,  although  I  believe  they  can,  little  by  little, 
get  greater  efficiency  in  operation.  They  must,  therefore,  ask 
the  country  to  permit  an  increase  in  rates,  and  the  Congress  to 
permit  the  increase  to  take  effect  promptly,  without  undue  inter- 
ference from  state  and  federal  regulatory  bodies. 

Without  an  increase  in  rates  a  very  large  number  of  railroad 
companies  will  face  bankruptcy,  and  very  few  of  those  who  es- 
cape this  unfortunate  plight  can  pay  any  return  to  the  share- 
holders. 

Director  General  Hines,  in  several  public  utterances,  has. 
seemed  to  assent  to  the  principle  adopted  by  the  administration 
in  1918  of  adjusting  earnings  to  expenses.  He  has,  however,  in- 
dicated that  the  results  of  the  roads  in  1919  up  to  the  time  of 
his  public  addresses,  could  not  be  used  as  a  basis  for  calculating 
the  increase  necessary. 

For  example,  on  May  6,  1919,  in  Washington,  Mr.  Hines  said : 

The  present  unfavorable  results  naturally  lead  to  agitation  of  the  ques- 
tion whether  there  ought  to  be  an  increase  in  rates.  My  own  judgment  is 
that  the  present  conditions  are  too  abnormal  to  serve  as  a  basis  for  any 
general  change  in  the  level  of  rates  and  that  it  is  preferable  to  defer  action 
on  that  subject  until  there  shall  have  been  a  fuller  opportunity  to  get  a 
more  reliable,  and  possibly  a  more  normal,  measure  of  the  conditions, 
meanwhile  resorting  to  every  practicable  economy,  studying  the  situation 
with  the  greatest  care,  and  keeping  the  public  fully  informed  as  to  devel- 
opments. 

And  again,  in  St.  Louis,  on  May  19th: 

My  own  judgment  is  that  there  are  too  many  temporary  conditions  to 
justify  any  definite  action  at  the  moment  in  increasing  rates.  We  are 
going  to  get  some  additional  economy  in  operation,  a  reduction  in  the 
cost  of  material,  and  undoubtedly  a  very  large  increase  in  business,  and 
these  things  are  going  to  operate  to  make  the  conditions  more  favorable. 

And  again,  at  Omaha,  on  June  10th,  he  said : 

I  have  heard  it  stated  a  number  of  times,  and  I  believe  it  is  true, 
although  I  have  not  had  an  opportunity  to  check  the  figures,  that  when 
you  consider  the  price  paid  for  everything  else,  the  values  that  are  en- 
joyed by  every  article  transported  by  the  railroad,  a  given  unit  of  any 
commodity  will  buy  more  transportation  now  than  it  ever  did  before  in 
the  history  of  the  country.  A  ton  of  steel  or  a  bushel  of  wheat  or  any 
other  unit  of  any  commodity  will  buy  more  transportation  now  than  ever 
before. 

The  result  of  that  is  that  freight  rates  at  the  present  time,  instead  of 
being  higher  than  ever  before,  are  lower  than  before  when  tested  by 
the  value  of  the  unit  transported  and  tne  amount  of  transportation  which 
that  article  transported  will  buy. 

That  leads  a  great  many  people  to  urge  that  there  ought  to  be  an  imme- 
diate increase  in  rates  in  order  to  meet  the  situation. 

I  have  had  the  experience,  which  is  rather  unique,  of  having  various 
shippers  come  to  me  and  urging  that  railroad  rates  ought  to  be  increased 
to  take  care  of  this  situation.     I  don't  suppose  that  condition  has  ever 

[60S] 


94  RAILROAD  LEGISLATION  [Vol.  VIII 

existed  before  in  this  country  where  the  shipping  public  has  voluntarily 
asked  that  the  rates  be  increased. 

This  is  by  reason  of  the  fact  that  there  has  been  such  a  striking  object 
lesson,  that  railroad  costs  have  increased  to  much  greater  proportion  than 
the  rates  have  increased,  and,  therefore,  the  railroad  operations  are  not 
likely  to  be  self-sustaining  in  business  with  no  increase  in  rates. 

My  position  on  that  subject  has  been  that  it  is  important  for  us  not  to 
increase  rates  more  than  it  is  absolutely  necessary,  that  it  is  very  desirable 
for  us  to  form  a  better  idea  than  it  is  possible  for  us  to  form  at  the  mo- 
ment as  to  the  extent  to  which  the  present  deficit  will  be  eliminated  by 
the  expected  increase  in  business. 

The  railroad  officers  agree  that  it  is  very  important  not  to  in- 
crease rates  any  more  than  is  necessary.  This  is  a  country  of 
vast  distances  and  complicated  transportation  conditions,  and  rail- 
road officers  appreciate  as  well  as  any  class  of  men  in  industrial 
life  the  desirability  of  having  rates  adjusted  so  that  continuous 
development  will  go  on  in  the  country.  They  also  realize,  as  they 
never  have  before,  that  it  is  their  duty  to  the  public  to  take 
every  reasonable  step  to  have  rates  so  adjusted  that  good  service 
can  be  given  to  the  public,  good  compensation  to  employees,  and 
returns  made  to  present  and  prospective  owners  of  securities  so 
that  capital  can  be  obtained  for  the  necessary  expansion  of  the 
plant. 

Again,  Mr.  Hines,  at  Indianapolis,  on  October  15th,  in  com- 
menting on  the  situation,  said : 

I  want  to  say  broadly  without  at  the  moment  undertaking  to  go  into 
detail  that  the  railroads  of  the  country  at  the  present  time  are  handling 
a  larger  business  than  they  handled  last  year,  and  the  business  they 
handled  last  year  was  larger  than  the  business  they  had  handled  in  previ- 
ous years.  They  are  doing  that  at  rates  which  represent  a  lower  propor- 
tion of  the  value  of  the  things  transported  than  I  believe  has  ever  been 
true  in  the  past.  We  know  from  experience  that  the  price  of  nearly  every- 
thing has  gone  up  far  more  than  the  cost  of  its  production  has  justified, 
but  the  price  of  transportation  has  gone  up  in  less  proportion  than  has  the 
cost  of  producing  it. 

The  Director  General  has  also  expressed  the  fear  that  any  in- 
crease in  rates  that  might  be  made  by  the  government  would 
be  reflected  in  a  further  increase  in  the  cost  of  living  on  the 
ground  that  those  who  sell  various  articles  would  add  to  the 
prices  very  much  more  than  any  increase  in  freight  rates  justified. 
An  increase  in  the  price  of  anything  will,  of  course,  have  a  bear- 
ing on  the  cost  of  living,  but  keeping  the  railroads  on  starvation 
wages  will,  in  the  long  run,  increase  the  cost  of  living  because 
production  and  development  will  be  checked  through  lack  of 
suitable  and  adequate  transportation  for  handling  the  necessities 
of  life  and  industry.  If  an  increase  in  rates  be  used  unfairly 
to  increase  prices,  it  is  surely  a  better  national  policy  to  check 

[606] 


No.  4]  THE  REVENUE  NEEDS  OF  THE  RAILROADS  95 

that  tendency  by  the  force  of  public  opinion  or  by  law  than  to 
continue  a  policy  which  will  mean  a  crippling  of  the  transporta- 
tion machine,  making  it  unable  to  meet  the  needs  of  the  public. 

For  the  first  nine  month  of  this  year,  108  out  of  165  important 
companies  and  systems  are  not  earning  their  fixed  charges,  en- 
tirely excluding,  of  course,  any  dividends  on  their  stock  or  any 
contributions  to  improvements  that  formerly  were  made  out  of 
earnings.  For  the  same  period  130  companies  are  not  earning 
their  standard  return;  in  other  words,  are  not  up  to  their  pre- 
war earning  power  by  $286,000,000.  Only  35  companies  are 
earning  their  standard  return,  or  bettering  it,  and  that  only  to  the 
extent  of  about  $41,500,000.  These  165  roads  failed  by  nearly 
$57,000,000  to  earn  their  fixed  charges. 

I  think  the  following  statements  are  sound : 

1.  That  a  day's  pay,  or  a  unit  quantity  of  any  article  of  commerce, 
will  purchase  far  more  transportation,  both  freight  and  passenger,  to-day 
than  ever  before  in  the  history  of  the  country.  It  other  words,  rates  have 
not  increased  in  proportion  to  the  increase  in  wages  and  prices  of  com- 
modities. 

2.  That  the  results,  as  the  year  1919  draws  to  an  end,  give  no  encour- 
agement to  the  hope  that  rates,  wages,  costs  and  volume  of  business  will 
produce  a  net  operating  income  equal  even  to  the  standard  return.  The  de- 
ficit may  be  $350,000,000,  and  $450,000,000  compared  with  the  year  ending 
June  30,  1917. 

3.  That  the  so-called  "Standard  Return"  of  $935,000,000  (for  all  roads) 
does  not  represent  a  sum  large  enough  to  attract  new  capital  needed  for 
future  expansion,  and  the  net  operating  income  for  the  year  ended  June 
30,  1917,  was  $1,035,000,000,  or  $100,000,000  more  than  the  standard  re- 
turn. Since  then  the  plant  has  been  increased  in  value  and  capacity 
and  is  fairly  entitled  to  a  much  larger  return. 

4.  That  many  millions  of  dollars  must  be  spent  in  doing  work  on  equip- 
ment and  tracks  that  could  not  be  done  during  the  war  period,  and  addi- 
tional expenses  must  be  met  in  1920,  such  as  higher  prices  for  fuel  and 
additional  charges  not  included  in  1919  accounts,  and  that  there  is  a  steady 
and  large  increase  in  taxes. 

5.  That  a  failure  to  obtain  additional  revenue  will  mean  bankruptcy  for 
many  roads  and  serious  financial  difficulties  for  all. 

6.  That  this  condition  will  check  the  expansion  of  facilities  just  at  a 
time  when  the  country  should  be  getting  ready  for  an  increased  participa- 
tion in  world  affairs. 

7.  That  it  is  better  for  the  country  for  the  railroads  to  be  supported 
through  rates  rather  than  by  contributions  from  the  state  and  national 
treasuries. 

8.  That  the  total  additional  revenue  needed,  while  running  into  very 
large  figures,  is  not  large,  considering  the  needs  and  powers  of  a  virile 
nation  of  105,000.000,  that  has  absorbed  $21,000,000,000  of  Liberty  Bonds 
in  two  years.  They  can  well  afford  to  have  a  good  Transportation  Ma- 
chine, and  to  encourage  rather  than  to  discourage  the  owners  to  create  and 
maintain  it. 

For  the  purpose  of  making  good  the  disparity  between  income 
and  outgo  that  has  grown  up  as  a  result  of  the  conditions  de- 
veloped by  the  war,  for  the  purpose  of  restoring  the  earning 

[607] 


96  RAILROAD  LEGISLATION  [Vol.  VIII 

power  of  the  roads  which  has  been  impaired,  for  the  purpose  of 
establishing  that  earning  power  on  a  basis  that  will  create  a 
credit  for  the  immedite  upbuilding  of  the  transportation  ma- 
chine, the  railroads  are  now  preparing  to  ask  for  an  increase  in 
rates.  How  much  this  increase  should  be  I  am  not  prepared  to 
say  to-night.  It  will  require  patient,  careful  study.  The  rail- 
road officers  have  appointed  a  committee  of  eight  executives, 
representing  all  parts  of  the  country,  of  which  I  have  the  honor 
to  be  chairman.  This  committee  is  now  actively  at  work  taking 
preliminary  steps  in  an  effort  to  answer  the  question  as  to  what 
"The  Revenue  Needs  of  the  Railroads"  are  and  how  they  can  be 
obtained  through  suitable  tariffs.  This  committee  and  its  asso- 
ciates, I  can  assure  you,  are  fully  alive  to  the  seriousness  of  the 
situation  and  of  the  position  of  trust  they  occupy  in  trying  to 
solve  the  problem  fairly  in  the  interest  of  the  public,  the  great 
army  of  employees,  the  very  large  number  of  owners,  and  the 
still  larger  number  of  people  who  are  vitally  interested  because 
of  their  savings  bank  deposits  and  insurance  policies. 

I  believe  the  sober  judgment  of  the  people  will  realize  the  jus- 
tice of  the  request  and  will  support  it.  Time  is  most  important, 
and  the  help  of  such  organizations  as  this  with  members  of  Con- 
gress and  with  regulatory  boards  will  be  most  beneficial. 

I  hope  I  have  made  it  clear  to  you  that  an  increase  in  rates  is 
absolutely  necessary  in  order  to  meet  "The  Revenue  Needs  of  the 
Railroads"  so  that  they  can  do  their  full  duty  to  the  public,  and 
that  you  can  give  your  support  to  our  reasonable  requests  for  in- 
creased, rates. 


[608] 


RAILROAD  LEGISLATION 

ALFRED  P.  THOM 
General  Counsel  of  Association  of  Railway  Executives 

UNDER  the  limitations  of  time  which  this  occasion  neces- 
sarily imposes,  it  will  be  impossible  to  discuss,  except 
in  the  most  general  way,  the  railroad  problem  and  the 
system  of  legislation  appropriate  for  its  solution. 

From  unmistakable  manifestations  of  public  opinion,  it  must 
be  assumed  that  a  system  of  governmental  ownership  and  opera-, 
tion  will  not,  for  the  present  at  least,  be  accepted  by  the  Ameri- 
can people. 

Private  ownership  and  operation  being  thus  the  only  aspect 
of  the  matter  (at  least  for  the  time  being)  open  for  consideration, 
the  question  is  what  system  of  governmental  regulation  shall  be 
adopted  in  order  to  make  railroad  transportation,  privately  owned, 
supported  and  operated,  a  success  and  adequate  to  the  needs  of 
the  public. 

It  is  unthinkable  that  there  can  be  any  difference  of  purpose  in 
this  regard  on  the  part  of  any  of  those  charged  with  responsibility 
in  the  matter.  Whatever  difference  there  is  must  be  a  difference 
as  to  methods.  All  must  agree  that  the  system  of  regulation, 
whatever  it  is,  must  insure  the  adequacy  and  efficiency  of  trans- 
portation, for  the  capacity  of  the  instrumentalities  of  transpor- 
tation marks  the  maximum  capacity  of  productive  industry,  and 
the  public  will  never  consent  that  productive  industry  shall  be 
artificially  limited  by  inability  to  reach  the  markets  of  the  world. 

It  is  important,  then,  to  inquire  what,  broadly  speaking,  are 
the  essentials  of  an  adequate  and  efficient  transportation  system 
supported  by  private  capital. 

In  the  transportation  crisis  which  now  confronts  the  country, 
there  are  two  periods  to  consider  and  provide  for : 

First,  the  period  which  must  intervene  between  the  end  of 
Federal  control  and  the  time  when  such  a  relationship  is  estab- 
lished between  revenues  and  expenses  as  to  make  the  roads  self- 
sustaining.  This  may  be  termed  the  "Period  of  Restoration"; 
and, 

Second,  the  period  succeeding  the  Period  of  Restoration,  which 
may  be  termed  the  "Permanent  Period." 

[609] 


98  RAILROAD  LEGISLATION  [Vol.  VIII 

As  to  the  Period  of  Restoration,  there  seems  to  be  general 
concurrence  in  the  view  that  a  means  must  be  devised  to  assure 
to  the  carriers  reasonably  adequate  revenues  during  this  period 
and  to  arrange  for  the  funding  of  their  capital  indebtedness  to 
the  Government.  While  differences  exist  as  to  how  and  the 
extent  to  which  this  shall  be  done,  it  is  hoped  that  a  just  solution 
will  ultimately  be  reached. 

It  would  be  difficult  for  the  great  facts  of  the  situation  to 
escape  intelligent  attention.  The  carriers  have,  for  public  pur- 
poses, been  deprived  of  the  use  and  management  of  their  proper- 
ties for  two  years.  During  that  time  their  organizations  have 
been  disrupted ;  much  of  the  traffic  normally  tributary  to  the 
individual  lines  has  been  diverted  to  others,  and  the  rolling  stock 
of  each  carrier  has  been  scattered  from  ocean  to  ocean.  In 
addition  to  this  the  labor  expenses  alone  of  the  carriers  as  a 
whole  have  been  increased  during  these  two  years  approximately 
a  thousand  millions  of  dollars  a  year. 

Time  and  money  will  be  required  to  restore  the  individual  car- 
riers to  the  effective  enjoyment  of  their  several  properties  and  to 
the  efficient  organization  which  is  essential  to  success.  I  think  it 
may  be  safely  assumed  that  these  conditions  will  be  recognized 
and  that  some  provision  will  be  made  to  cover  this  Period  of 
Restoration.  I  will  not  refer  further  to  this  aspect  of  the  matter, 
but  will  turn  my  attention  to  the  Permanent  Period,  and  to  the 
principles  of  regulation  which  should  be  adopted  by  the  Govern- 
ment as  a  permanent  policy. 

If  the  transportation  facilities  which  are  adequate  to-day  would 
be  adequate  next  year  and  for  all  times  in  the  future,  the  problem 
would  be  comparatively  simple.  In  that  case  it  would  be  neces- 
sary to  provide  only  for  the  maintenance  and  operation  of  the 
instrumentalities  of  transportation  at  standards  of  capacity  and 
efficiency  adequate  for  present  needs.  This  could  be  easily  done. 
But  we  live  in,  and  must  think  and  act  for,  a  vast  and  fertile  land 
which  has  not  yet  reached  the  limit  of  its  development — a  land 
which  will  grow  for  centuries  to  come  in  both  population  and  in 
the  products  of  its  industry.  This  means  that  the  capacity  of 
transportation  must  grow  so  as  to  at  least  keep  pace  with — in  fact, 
it  should  somewhat  anticipate — the  growing  and  expanding  needs 
of  commerce. 

To  provide  for  this  will  require  the  constant  input  of  new  cap- 
ital.   The  amount  of  such  new  capital  needed  to  insure  the  ade- 

[610] 


No.  4]  RAILROAD  LEGISLATION  99 

quacy  of  transportation  facilities,  was  estimated  by  the  late  James 
J.  Hill  at  not  less,  for  a  series  of  years,  than  one  thousand  mil- 
lions of  dollars  a  year.  The  statistics  of  the  Interstate  Com- 
merce Commission  indicate  an  actual  input  for  each  year  of  the 
nine  between  1907  and  1916  of  about  $579,000,000.  The  sum  of 
about  $576„000,000  was  actually  expended  for  additions  and  bet- 
terments by  the  Federal  Railroad  Administration  during  the 
calendar  year  1918. 

Without  undertaking  to  forecast  the  actual  amount  that  will  be 
required  in  the  future,  it  is  manifest,  if  transportation  facilities 
are  to  be  kept  measurably  adequate  to  the  needs  of  commerce, 
that  many  hundred  millions  of  dollars  of  new  money  must  be 
provided  each  year  by  private  investors.  They  must  be  attracted. 
They  can  not  be  coerced. 

The  problem,  therefore,  of  the  railroads,  and  the  problem  of 
the  public  in  respect  to  transportation,  is  a  problem  of  credit. 

The  test,  which  any  system  of  governmental  regulation  of 
privately  supported  transportation  facilities,  must  successfully 
stand,  is  whether  it  adequately  provides  for  and  maintains  the 
necessary  railroad  credit. 

If  it  does  not,  it  must  be  changed  or  the  system  of  private  own- 
ership must  be  abandoned;  if  it  does,  the  system  of  private  owner- 
ship will  succeed.  Let  us  look,  then,  at  the  question  of  credit 
from  the  standpoint  of  the  private  investor,  for  it  is  with  him,  in 
the  final  analysis,  that  the  system  of  regulation  must  reckon. 

When,  under  the  existing  system,  he  is  approached  with  the 
proposal  that  he  invest  in  a  railroad  enterprise,  with  what  is  he 
confronted?  He  is  offered  an  investment  in  a  business  as  to  the 
revenues  of  which  he  has  no  control.  They  are  controlled  for  him 
by  governmental  authority.  Nor  can  he  rely  on  the  control  being 
based  on  business  principles.  The  standards  of  regulation  are 
set  by  legislative  bodies  sensitively  alive  to  political  considerations 
and  limitations.  This  is  inherent  in  our  system  of  government. 
Legislative  action  will  always  be  responsive  to  public  opinion,  no 
matter  how  uninformed  or  misinformed.  There  can  be  no  as- 
surance to  the  investor  that  public  opinion  will  be  always  gov- 
erned by  a  broad  appreciation  of  business  needs  and  conditions. 
Moreover,  the  investor  can  not  be  certain  of  a  uniform  or  con- 
sistent standard  of  regulation,  political  or  business,  inasmuch  as 
a  part  of  his  revenues  are  regulated  by  the  national  authority, 
and  the  remainder  by  the  several  states  through  which  the  roads 

[611] 


100  RAILROAD  LEGISLATION  [Vol.  Vm 

may  run.  with  their  inharmonious  and  divergent  policies.  It 
must,  I  think,  be  admitted  that,  as  the  system  of  regulation  now 
stands,  there  is  little  on  the  revenue  side  to  attract  the  private 
investor. 

Turning  to  the  expense  account,  the  investor  sees  that  he 
would  have  far  less  control  over  his  expenses  than  in  most  of  the 
other  subjects  of  investment  open  to  him.  Aside  from  the  pecu- 
liarly exposed  position  of  the  railroads  in  labor  controversies, 
their  expenses  may  be  added  to  by  governmental  requirements  as 
to  facilities  and  service — the  separation  of  grades,  the  enlarge- 
ment of  train  crews,  the  enlargement  and  improvement  of  sta- 
tions, the  equipment  of  cars  and  engines,  and  many  other  mat- 
ters legitimately  subject  to  governmental  regulation;  and  here, 
again,  both  the  national  Government  and  the  governments  of 
the  several  states,  all.  possess  powers  to  increase  the  expense 
account. 

Thus  the  expense  account  of  the  business  to  which  the  private 
investor  must  be  attracted,  is  seen  to  be  largely  beyond  the 
owner's  control. 

Without  referring  to  other  deterrent  conditions — such  as  the 
hope  he  must  abandon  of  speculative  or  large  returns — if  he  em- 
barks in  this  line  of  investment,  and  the  positive  attractions  of 
competing  subjects  of  investment  which  are  free  from  govern- 
mental regulation,  from  political  interference,  and  which  are  un- 
restricted in  opportunities,  let  us  turn  to  the  things  that  must  be 
done,  if  the  policy  of  private  ownership  and  operation  is  to  suc- 
ceed. 

From  what  has  been  said,  it  is  manifest  that  it  is  a  condition 
precedent  to  any  successful  system  of  regulation  that  there  shall 
be  an  assurance  to  the  investing  public  of  revenues  to  the  car- 
riers adequate  to  attract  the  necessary  investment.  The  old  sys- 
tem of  unlimited  and  uncontrolled  discretion  in  the  Interstate 
Commerce  Commission  will  not  be  sufficient.  Congress  has  re- 
cently received  from  even-  investing  source  the  assurance  that 
this  system  has  not  prevented  an  alarming  decline  of  railroad 
credit.  This  conclusion  has  been  reflected  in  each  of  the  leading 
plans  proposed  to  Congress — in  the  YVarfield  plan,  by  subjecting 
the  discretion  of  the  Commission  to  a  fixed  statutory  percentage 
on  values  as  a  guide  to  rates ;  in  the  Chamber  of  Commerce  plan, 
by  likewise  subjecting  the  Commission's  discretion  to  a  perma- 
nent rule  of  a  fixed  percentage  on  values;  and  in  the  Railway 

[612] 


No.  4]  RAILROAD  LEGISLATION  101 

Executives'  plan,  by  securing  from  an  independent  board, 
charged  with  the  obligation  to  see  that  transportation  facilities 
and  service  are  at  all  times  adequate,  a  certificate  of  the  amount 
of  revenue  that  is  necessary  that  rates  shall  provide.  In  fact,  it 
can  not  be  denied  that  the  conviction  is  widespread,  and,  outside 
of  governmental  circles,  universal,  that  something  must  be  added 
to  the  discretion  of  the  Interstate  Commerce  Commission  if  the 
confidence  of  the  investing  public  is  to  be  attracted. 

The  railway  executives,  from  advices  which  they  can  not  dis- 
regard, apprehend  that  no  fixed  percentage  on  values  can  be 
adopted  which  will  be  adequate  for  the  needs  of  the  carriers ;  and. 
if  a  fixed  percentage  is  adopted,  it  will  be  accompanied  by  other  • 
conditions  which  can  not  be  satisfied  without  undermining  the 
very  foundations  of  all  property.     They,  accordingly,  have  not 
seen  fit  to  recommend  a  percentage  figure  in  the  statute,  but  have 
urged,  and  are  urging,  upon  the  attention  of  Congress  the  neces- 
sity for  a  rule  of  rate-making  which  shall  be  precise  and  definite, 
and  shall  contain  a  statutory  assurance  that  the  proper  elements 
in  determining  what  revenue  rates  shall  provide,  will  be  properly 
considered  by  the  regulator}-  body,  and  the  necessary  amount  of 
revenue  will  be  raised.    We  do  not  think  that  there  can  be  a  legiti- 
mate doubt  that  the  revenues,  considered  in  respect  to  average 
conditions  in  a  traffic  group,  should  be  adequate  to  provide  (1) 
for  the  expenses  of  operation,  including  labor  and  taxes;   (2) 
a  fair  return  upon  the  property  used  or  held  for  the  public  serv- 
ice; and,  (3)  a  surplus  sufficient  as  a  basis  of  credit  to  attract  the 
new  capital  needed  for  the  facilities  and  service  which  the  com- 
merce of  the  country  must  have.     We  think,  further,  that,  in 
the  present  condition  of  inadequate  credit  under  the  system  of  un- 
restricted discretion  in  the  Commission,  it  is  necessary  to  provide 
an  authority  whose  express  statutory  duty  it  shall  be  to  see  that 
the  facilities  and  service  in  transportation  are  up  to  the  require- 
ments of  commerce ;  to  study  the  credit  of  the  carriers  with  refer- 
ence to  their  needs  in  order  that  they  may  be  able  to  provide  these 
facilities;  and  to  certify  the   facts  to  the   Commission,   which 
should  take  them  as  their  guide  in  rate  making. 

If  these  requirements  arejmt  in  the  form  of  definite  statutory 
duties,  we  believe  that  the  administrative  authorities  will  faith- 
fully administer  them,  and,  in  doing  so,  will  be  supported  bv  an 
express  statutory  mandate  in  providing  the  revenues  declared 
necessary  by  the  legislature. 

[613] 


102  RAILROAD  LEGISLATION  [Vol.  VIII 

We  believe  that  all  revenues  must  come  from  rates;  that  it  is 
as  much  beyond  the  limits  of  constitutional  regulation  to  make  the 
rates  too  high  for  the  service  as  it  is  to  make  the  rates  too  low ; 
and  that  no  rate  can  lawfully  be  permitted  to  be  collected  which  it 
is  unlawful  for  the  carrier  performing  the  service  to  retain. 

If  the  private  investor  is  to  be  attracted,  it  is,  in  our  judgment, 
necessary  to  avoid  taking  away  any  part  of  a  carrier's  earnings 
from  lawful  rates.  To  do  so  would,  in  our  opinion,  be  unconsti- 
tutional. It  is  not  proposed,  however,  to  state  here  the  reasons 
for  that  view. 

If  it  is  constitutional,  it  is  all  the  more  dangerous,  for,  in  that 
event,  there  would  be  no  relief  from  it  in  the  courts.  The  thought- 
ful investor  would,  of  course,  appreciate  that  the  consequence  of 
the  assertion  in  the  law  of  a  legislative  power  to  take  all  of  the 
earnings  of  a  road  at  lawful  rates  above  a  limit  fixed  in  the  dis- 
cretion of  this  Congress,  would  be  that  the  next,  or  a  succeeding, 
Congress  might  take  still  more,  until  the  point  of  acknowledged 
confiscation  is  reached.  The  railroad  industry  would  thus  be  the 
only  industry  subject,  at  the  present  time,  to  the  assertion  of  such 
a  power,  and  the  question  would  be  whether  the  investing  public 
would  seek  the  one  subject  in  the  field  of  industry  where  the 
amount  of  its  earnings  at  lawful  rates  might  be  taken  away  at 
legislative  discretion  or  caprice.  To  engraft  this  principle  upon 
the  system  of  railroad  regulation  would  be  to  implant  in  it  the 
seeds  of  its  own  death,  because  no  industry  can  survive  when  it 
is  thus  discriminated  against,  and  thus  made  unattractive  to  the 
investing  public.  It  must  be  realized  that  while  what  has  been 
said  is  justified  even  from  the  standpoint  of  rates,  it  is  equally 
clear  that,  irrespective  of  rates,  the  proposal  is  both  indefensible 
and  destructive.  For  example,  let  us  take  two  roads  costing  ex- 
actly the  same  amount  and  doing  exactly  the  same  business  at 
exactly  the  same  rates.  Oie  of  these  roads  is  well  managed. 
The  money  spent  upon  it  has  been  used  in  reducing  grades,  in 
eliminating  curves,  in  acquiring  engines  with  greater  motive 
power,  and  in  other  directions  which  promote  economy.  The 
money  spent  upon  the  other  has  not  been  wisely  spent.  The  net 
results  of  the  two  will  be  entirely  different — the  difference  not 
being  due  to  difference  in  cost,  or  to  difference  in  business,  or  to 
difference  in  rates,  but  entirely  due  to  difference  in  financial  man- 
agement, in  wisdom  of  conception,  and  in  operation.  One  may 
earn  precisely  the  amount  Congress  will  be  willing  for  it  to  retain, 

[614] 


No.  4]  RAILROAD  LEGISLATION  103 

the  other  more.  The  proposal  is  to  take  from  the  better  managed 
road  all  that  it  earns  over  a  given  figure,  and  reduce  it  to  the  dead 
level  of  the  other.  Outside  of  the  question  of  law  or  morals,  such 
a  proposal  would  absolutely  destroy  enterprise,  initiative  and 
good  management ;  and  these  elements  of  advantage  to  the  public 
would  be  thus  withdrawn  from  the  public  service. 

May  I  not  digress  at  this  point  to  suggest  that  this  principle 
would  open  wide  the  door  to  socialism?  If  the  principle  can  be 
applied  to  railroads,  which  are  now  regulated  by  public  authority, 
what  answer  can  be  made  to  the  effort  to  apply  it  to  any  subject 
which  may  hereafter  be  regulated,  such  as  fuel,  the  manufacture 
of  essential  articles,  or  even  money  ?  The  rate  on  money  is  even 
now  regulated  by  public  authority.  Is  it  not  easy  for  the  legisla- 
tive authority  to  declare  that  the  interest  rate  is  made  as  high  as 
it  is  out  of  consideration  for  those  who  have  little  money  to  lend 
and  are  thus  weak  financially,  that  it  is  too  high  for  the  strong, 
and  that  a  part  of  the  earnings  of  the  strong  at  the  legal  rate 
must  be  "recaptured"  and  taken  away?  If  the  inequality  of  con- 
ditions as  to  the  possession  of  money  can  be  removed,  then  the 
dream  of  the  socialist  will  be  realized.  Is  it  not  essential  that 
all  those  who  value  democratic  institutions — based,  as  they  are, 
upon  equality  of  opportunity  and  security  in  the  possession  of  the 
fruits  of  labor — should  make  emphatic  protest  against  the  new 
doctrine  that  would  take  these  away,  and  should  insist  that  the 
limit  of  legislative  authority  as  to  railroad  rates  is  to  safeguard 
the  justice  and  reasonableness  of  the  charge,  and  can  not,  without 
an  overthrow  of  our  institutions,  extend,  by  any  power,  except 
that  of  taxation,  to  the  taking  of  any  part  of  earnings  at  lawful 
rates?  The  only  basis  for  this  novel  assertion  of  power  would 
be  that  a  given  amount  of  earnings  is  too  large  according  to  the 
existing  standard  of  legislative  discretion  or  caprice,  and  for 
that  reason  alone  may  be  taken  away.  The  consequences  of  such 
a  doctrine  strike  at  the  very  foundation  of  orderly  government 
with  limited  powers. 

Returning  now  to  the  railroads,  and  if,  as  above  suggested,  a 
method  of  securing  adequate  revenues  is  provided,  the  question 
arises  as  to  where  these  reveftues  are  to  come  from.  It  is  mani- 
fest that  they  should  not  all  be  provided  by  any  one  class  of 
traffic.  They  should  not  all  come  from  interstate  commerce, 
nor  should  they  all  come  from  the  state  commerce  of  these  inter- 
state carriers.     No  policy  can  be  sound  which  does  not  properly 

[615] 


104  RAILROAD  LEGISLATION  [Vol.  VIII 

distribute  the  burden  of  raising  these  revenues  equitably  among 
all  the  commerce  of  the  interstate  carriers,  state  and  interstate. 
How  can  this  equitable  distribution  be  made?  There  can  be  no 
assurance  of  equity  if  one  authority  fixes  one  class  of  these 
rates,  and  another  authority,  or  many  other  authorities,  fix  the 
remainder.  There  must  be  some  way  of  bringing  the  two  to- 
gether. 

The  constitutional  duty  and  power  to  regulate  interstate  com- 
merce rests  upon  the  national  Government,  and  that  Government 
should  be  the  authority  to  make  the  distribution  of  the  burden  of 
raising  the  needed  revenues  over  all  the  traffic  of  the  interstate 

carriers. 

We  are  told  that  this  cannot  be  done ;  and  that,  whatever  the 
result,  some  other  system  than  that  of  a  single  and  homogeneous 
regulation  must  be  provided. 

What  greater  commentary  could  there  be  on  the  exposed  po- 
sition of  the  railroad  industry?  The  national  Congress,  in  all 
matters  within  its  constitutional  jurisdiction,  represents  all  the 
states.  It  is  not  a  foreign  power.  It  represents  all  the  states  in 
the  matter  of  their  foreign  relations,  in  the  matter  of  providing 
for  the  common  defense  and  of  making  war,  in  the  matter  of  the 
establishment  of  a  national  currency,  in  all  matters  relating  to 
imports  and  exports,  and  in  providing  and  maintaining  a  system 
of  post  offices  and  post  roads.  It  is  also,  by  the  Constitution,  the 
representative  of  all  the  states  in  respect  to  the  regulation  of 
interstate  and  foreign  commerce.  Singularly  enough,  of  all  the 
powers  above  mentioned,  it  is  only  this  power  of  regulating  com- 
merce which  has  been  dissented  from  by  any  section  of  public 
opinion,  and  yet  the  necessity  for  establishing  equality  of  com- 
mercial opportunities  among  the  several  states  was  the  most 
potent  and  direct  influence  in  bringing  about  and  establishing  the 
Union.  The  situation,  just  prior  to  the  adoption  of  the  Consti- 
tution, is  thus  described  by  Mr.  Fiske  in  his  "Critical  Period  of 
American  History:" 

"The  City  of  New  York,  with  its  population  of  thirty 
thousand  souls,  had  long  been  supplied  with  firewood  from 
Connecticut,  and  with  butter  and  cheese,  chickens  and  gar- 
den vegetables  from  New  Jersey.  This  trade,  it  was  ob- 
served, carried  thousands  of  dollars  out  of  the  city  and  into 
the  pockets  of  the  detested  Yankees  and  despised  Jerseymen. 

[616] 


No.  4]  RAILROAD  LEGISLATION  105 

It  was  ruinous  to  domestic  industry,  said  the  men  of  New 
York.  It  must  be  stopped  by  those  effective  remedies  of  the 
Sangrado  school  of  economic  doctors,  a  navigation  act  and  a 
protective  traiff. 

"Acts  were  accordingly  passed  obliging  every  Yankee  sloop 
which  came  down  through  Hell  Gate,  and  every  Jersey  market 
boat  which  was  rowed  across  from  Paulus  Hook  to  Cortlandt 
Street,  to  pay  entrance  fees  and  obtain  clearances  at  the  Cus- 
tom House,  just  as  was  done  by  ships  from  London  or  Ham- 
burg ;  and  not  a  cart  load  of  Connecticut  firewood  could  be  de- 
livered at  the  back  door  of  a  country  house  in  Beekman  Street 
until  it  should  have  paid  a  heavy  duty.    Great  and  just  was  the 
wrath  of  the  farmers  and  lumbermen.    The  New  Jersey  legis- 
lature made  up  its  mind  to  retaliate.     *     *     *     Connecticut 
was  equally  prompt.     *     *     *    By  such  retaliatory  measures, 
it  was  hoped  that  New  York  might  be  compelled  to  rescind  her 
odious  enactment.    But  such  meetings  and  such  resolves  bore 
an  ominous  likeness  to  the  meetings  and  resolves  which,  in  the 
years  before  1775,  had  heralded  a  state  of  war;  and  but  for 
the  good  work  done  by  the  Federal  Convention   (in  adopt- 
ing our  Constitution)  another  five  years  would  scarcely  have 
elapsed  before  shots  would  have  been  fired,  and  seeds  of 
perennial  hatred  sown  on  the  shores  that  looked  toward  Man- 
hattan Island." 

It  was  thus  the  states  that  insisted  that  an  authority  which 
represented  them  all  should  regulate  commerce  between  them; 
for,  as  stated  by  Chief  Justice  Marshall: 

"The  Government  of  the  United  States  is  the  Government 
of  all;  its  powers  are  delegated  by  all;  it  represents  all  and 
acts  for  all.  Though  any  one  state  may  be  willing  to  control 
its  operations,  no  state  is  willing  to  allow  others  to  control 
them." 

It  thus  becomes  not  a  violation  of  states'  rights,  but  is  essen- 
tially a  right  of  each  state,  to  have  the  instrumentalities  of  inter- 
state commerce  regulated  by  a  governmental  authority  which  rep- 
resents all  the  states,  and  can  establish  a  uniform  standard  of 
commercial  facilities  and  opportunities,  and  not  to  be  controlled 
by  the  narrow  or  selfish  policy  of  a  sister  state. 

For  the  reasons  thus  imperfectly  and  inadequately  stated,  it 

[617] 


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[617b] 


106  RAILROAD  LEGISLATION  [Vol.  VIE 

is  submitted  that,  if  a  system  of  transportation  supported  by  pri- 
vate capital  is  to  succeed,  it  is  necessary : 

First,  That  revenues  shall  be  provided  sufficient  to  enable  the 
carriers  to  efficiently  perform  their  public  duties,  and,  to  that 
end,  that  a  rule  of  rate  making  be  established  which  shall  express, 
as  a  plain  statutory  requirement,  the  elements  that  must  be  con- 
sidered by  the  rate  making  power,  and  that  the  Commission,  in 
making  rates,  shall  be  guided  by  the  expert  advice  of  a  board 
specially  charged  with  the  responsibility  of  seeing  that  the  trans- 
portation facilities  and  service  are  adequate  to  the  needs  of  com- 
merce, and  with  the  duty  of  ascertaining  and  certifying  to  the 
Commission  the  amount  of  revenues  the  carriers  need  in  order 
to  provide  them ;  and 

Second,  that  the  burden  of  providing  these  revenues  shall  be 
properly  distributed  by  a  single  authority — which,  in  the  nature 
of  things,  can  only  be  the  national  Government — between  all  the 
traffic,  state  and  interstate,  of  these  interstate  carriers,  so  that  no 
class  of  traffic  shall  be  unduly  burdened,  and  no  carrier  shall  be 
required  to  furnish  service  of  any  class  at  less  than  reasonable 
compensation. 

In  other  words,  we  ask  for  a  system  of  harmonious  regulation, 
based  on  business  principles — a  system  which  shall  not  only  con- 
tain the  principles  of  correction  and  repression,  but  also  the  as- 
surance of  proper  and  adequate  encouragement  to  those  who  law- 
fully engage  in  this  basic  and  essential  industry. 


[618] 


RELATION  OF  VALUATION  TO  INVESTMENTS 

THOMAS  W.  HULME 
Vice- Chairman  of  the  President's  Committee  on  Federal  Valuation 

I  SUPPOSE  the  greatest  act  of  discourtesy  would  be  to  deny 
the  introduction  of  the  host,  and  yet  it  is  farthest  from  my 
purpose  to  talk  upon  fair  value.  There  isn't  any  such 
thing  as  fair  value.  It  is  just  value.  It  is  because  there  has  been 
so  much  talk  of  fair  value  in  rate  cases  that  we  have  all  this  con- 
fusion upon  the  subject  today. 

It  is  not  my  intention  either  to  go  into  the  many  phases  of  the 
valuation  problem,  but  rather  it  is  my  desire  to  suggest  to  in- 
vestors that  they  should  not  accept  what  has  been  given  out  as 
valuations  by  various  state  commissions  as  representing  the  true 
value  of  their  property.  Nor  should  they  take  these  reports  that 
are  being  given  out  by  the  Interstate  Commerce  Commission,  as 
representing  value,  because  they  are  not  even  an  attempt  upon 
the  part  of  the  Commission  to  determine  value.  They  are  merely 
inventories  or  reports  covering  the  investigations  made  by  the 
engineering,  land  and  accounting  sections  of  the  Commission  of 
things  that  are  to  be  taken  into  consideration  in  determining 
value. 

To  come  directly  to  the  subject  which  I  have  chosen  to  speak 
to  you  upon,  the  "relation  of  valuation  to  investments,"  we  should 
have  a  common  understanding  of  the  terms  "valuation"  and 
"investment."  The  present  investment  is  not  necessarily  what 
was  originally  put  into  the  property.  The  corporate  ownership 
may  have  changed  hands  upon  a  different  basis ;  some  portions 
of  the  physical  property  may  have  increased  in  value  and  some 
may  have  decreased  in  value.  The  Supreme  Court  of  the  United 
States  has  said  that  it  is  the  property  and  not  the  original  cost 
of  it  that  is  protected  by  the  Constitution,  and  of  which  property 
the  owner  may  not  be  deprived  without  due  process  of  law. 
Therefore,  as  it  is  the  property  that  is  the  investment,  it  means 
the  investment  is  measured  by  the  present  value. 

The  determination  ©f  the  value  of  property,  i.e.,  of  privately 
owned  property,  not  in  public  use  is  ordinarily  measured  by  what 
it  would  bring  in  exchange,  usually  determined  by  its  earnings 
past,  present,  and  prospective.  But  that  cannot  be  the  same 
when  you  come  to  deal  with  private  property  that  is  subject  to 

[619] 


108  RAILROAD  LEGISLATION  [Vol.  VTO 

public  use,  because  there  regulation  immediately  enters  and,  to  a 
certain  extent,  determines  the  result. 

Now  regulation  cannot  go  to  the  extent  of  destroying  the  value 
of  the  property,  nor  can  the  owners  of  the  property  make  such 
unreasonably  high  charges  as  to  increase  the  value  thereof.  The 
problem,  therefore,  is  how  is  this  situation  to  be  met?  Where 
rates  themselves  are  in  question,  the  value  cannot  be  determined 
by  the  capitalization  of  the  net. 

This  problem,  in  the  twenty-five  years  that  it  has  been  under 
consideration,  has  many  times  been  before  commissions  and 
courts.  Almost  always,  as  the  chairman  stated,  they  have  dodged 
the  real  determination.  They  have  approached  it  from  the  stand- 
point of  what  seemed  to  them  fair,  but  as  the  Constitution  stands 
in  the  way  of  taking  any  portion  of  the  property,  without  due 
process  of  law,  they  have  called  their  conclusions,  value.  These 
conclusions,  reached  by  many  different  commissions,  without  the 
determination  of  correct  principles  by  the  courts,  because,  as  the 
chairman  says — and  I  do  agree  with  him  sometimes — they  have 
not  been  definite  or  have  not  been  reached  with  courage,  have 
left  the  matter  in  an  uncertain  condition  until,  perhaps,  the 
present  time  when  it  seems  to  be  clarified. 

The  court  has  said  that  the  value  of  such  property  should  be 
determined  by  the  exercise  of  a  reasonable  judgment  in  the  con- 
sideration of  all  the  pertinent  facts,  including  the  actual  invest- 
ment if  known,  the  present  cost  of  production  of  the  property, 
its  condition,  its  earnings,  both  at  the  present  time  and  under 
contemplated  rates,  and  all  other  pertinent  facts. 

When  these  decisions  have  been  made,  it  has  not  usually  been 
known  to  which  of  these  factors  the  commission  has  given  the 
greatest  weight,  but  it  has  been  quite  clearly  shown  that,  while  in 
the  few  condemnation  cases,  that  is,  the  taking  of  the  ownership 
of  a  public  utility,  it  was  not  only  the  physical  property  that  had 
to  be  paid  for,  but  it  was  also  fhe  value  of  the  business,  the  en- 
joyment of  the  business,  that  had  to  be  paid  for.  Nevertheless, 
there  has  been  generally  a  tendency  to  deny  in  a  rate  proceeding 
that  the  business  had  to  be  taken  into  consideration,  but,  in  a  de- 
cision by  the  Supreme  Court  of  the  United  States  in  June  of  this 
year  (the  Denver  Water  Company  case)  it  seems  to  be  clearly 
decided  that,  even  in  a  rate  proceeding,  consideration  must  be 
given  not  only  to  the  bare  bones  of  the  property,  but  also  to  the 
business  of  the  utility.    That  seems  to  be  in  accordance  with  com- 

[620] 


No.  4]  RELATION  OF  VALUATION  TO  INVESTMENTS  109 

mon  sense,  because  I  think  it  is  generally  recognized  that  prop- 
erty is  worth  very  much  more  after  it  has  developed  a  business 
than  it  would  be  when  it  was  first  finished. 

We,  therefore,  have,  as  I  understand  it,  in  the  valuation  of 
property  privately  owned  but  used  for  a  public  purpose,  two  ma- 
jor elements  for  consideration.  First,  the  valuation  of  the  physi- 
cal property,  next  the  valuation  of  the  business,  ordinarily  re- 
ferred to  as  "going  concern"  value ;  in  the  case  of  a  private  busi- 
ness not  subject  to  Governmental  regulation,  it  is  commonly  re- 
ferred to  as  "good-will,"  although  the  term  "going  concern"  em- 
braces very  much  more  than  good-will.  A  local  monopoly,  such 
as  water,  gas  or  electric  property,  perhaps,  cannot  be  said  to 
have  good-will,  but  a  railroad  where  the  business  has  been  built 
up  under  competitive  conditions,  as  most  of  these  railroads  have 
been,  many  of  them,  enjoy  good-will,  so  that  in  some  cases  the 
good-will  would  be  present ;  in  other  cases  it  would  not. 

Our  first  consideration,  therefore,  is  the  determination  of  the 
value  of  the  physical  property.  Unquestionably  the  courts  have 
held,  in  many  cases,  that  the  cost  of  reproduction  properly  ap- 
plied is  the  measure  of  the  value  of  the  physical  property.  In 
the  case  of  any  normal  property,  i.e.,  one  whose  existence  is 
justified,  it  certainly  must  be  held  that  it  is  worth  its  cost  of  re- 
production under  a  proper  method.  It  is  conceded  that  there  may 
be  cases  of  railroads  and  other  utilities  that  have  been  constructed 
where  they  are  not  needed,  and  I  except  that  class  of  property 
to  my  contention.  But  great  care  must  be  taken  in  such  a  classi- 
fication of  any  property  lest  injustice  be  done. 

Now,  I  am  not  saying  that  the  cost  of  reproduction  must  neces- 
sarily be  at  present-day  prices,  but  I  am  saying  it  must  be  upon 
reasonable  conditions  that  would  be  generally  acceded  to  as  being 
reflective  of  a  general  situation;  if,  however,  any  governmental 
authority  should  attempt  at  this  time,  when  we  have  probably 
reached  a  permanent  level  of  higher  prices,  to  take  the  property 
of  such  a  company,  there  is  no  doubt  in  my  mind  but  that  in  a 
condemnation  proceeding  the  court  would  hold  that  the  trend 
of  prices  has  been  so  unmistakably  to  a  higher  level  that  the 
present-day  prices  would  apply. 

Therefore,  I  say  to  investors  that  the  weight  of  the  decisions 
of  our  courts  are  so  unmistakably  in  the  direction  of  a  protection 
to  them  in  a  valuation  proceeding  that  they  should  not  be  misled 
by  proceedings  in  the  past  which  have  been  made  solely  from  the 

[621] 


110 


RAILROAD  LEGISLATION  [Vol.  VTO 


standpoint  of  what  somebody  thought  was  "fair"  to  determine 

in  a  rate  case.  m  .«,..,      , 

What  has  been  the  effect  of  such  valuations,  such  fair  valu- 
ations? The  unmistakable  result  has  been  to  reduce  the  net 
earnings,  to  impair  the  credit  until  we  have  reached  the  present 
stage.  Now,  if  the  credit  is  to  be  restored,  as  Mr.  Oldham  and 
other  speakers  have  said,  it  must  be  through  an  authority  to  in- 
crease the  charges  to  a  point  where  they  will  not  only  yield  a 
return  on  the  present  investment,  but  also  yield  a  return  on  the 
amount  of  money  that  it  is  necessary  to  provide  for  extensions 
and  additions  and  betterments. 

So  frequently  governmental  bodies  overlook  that  point  in  estab- 
lishing their  rate  basis.  They  try  to  fix  it  on  what  has  been 
sufficient  for  the  past,  overlooking  the  fact  that  provision  must 
also  be  made  for  the  new  capital  that  is  going  into  the  property. 
If  we  have  in  the  case  of  a  justified  property  that  the  valuation 
of  its  physical  property  should  be  its  cost  of  reproduction,  pro- 
vided that  property  has  been  properly  maintained  for  the  purpose 
for  which  it  has  been  used,  we  then  have  to  consider  what  effect 
in  reaching  the  total  or  true  value  of  that  property  must  be  given 
to  its  earning  power.  Earning  power  means  potential,  future  de- 
velopments and  not  merely  the  present  basis  of  earnings. 

There  are  many  properties  that  are  unquestionably  worth  more 
than  their  mere  physical  value.  Where,  over  a  considerable 
period  of  years,  those  properties  have  yielded  a  return  upon  the 
investment  that  is  more  than  the  usual  interest  rate,  it  must  be 
recognized  that  those  properties,  because  they  have  an  earning 
capacity  greater  than  the  ordinary,  must  be  accorded  a  value 
greater  than  their  physical  value.  In  such  cases,  where  the  rates 
under  which  their  earnings  are  obtained  are  not  in  question,  the 
value  of  the  properties  would  be  what  you  are  accustomed  to 
think  them  to  be,  the  economic  value. 

Without  any  attempt  to  make  a  contention  that  there  must  be  a 
minimum  value,  it  must  also.be  apparent  that  any  road  that  is 
doing  a  great  volume  of  business,  even  though  in  the  past  under 
regulation  which  has  really  been  in  an  embryonic  state — regu- 
lators have  to  learn  just  as  great  business  organizations  have  to 
be  developed — that,  when  this  investigation  is  completed  by  the 
Interstate  Commerce  Commission,  they  will  have  at  hand  the 
information  that  will,  I  think,  give  the  answer  to  what  is  called 
the  present  railroad  problem. 

[622] 


No.  4]  RELATION  OF  VALUATION  TO  INVESTMENTS  111 

This  work  of  the  Commission  is  probably  the  greatest  eco- 
nomic task  ever  undertaken.  It  has  been  under  way  now  for  a 
little  more  than  six  years.  It  has  cost  over  sixty  millions  of  dol- 
lars. The  mere  inventory  work  will,  according  to  the  director 
in  charge,  be  completed  by  the  end  of  1921.  The  Commission  has 
refrained  from  attempting  to  determine  the  principles  of  valua- 
tion of  this  class  of  property  until  its  work  can  be  further  ad- 
vanced and  until  the  Commission  shall  have  before  it  some  of 
the  representative  types  of  property.  It  has  scheduled  a  hearing 
in  January  next  for  argument  upon  the  subject.  At  that  time, 
there  will  be  presented  to  it  the  views  that  I  have  just  expressed 
to  you  and  which,  if  they  should  be  successful  before  the  Com- 
mission, will,  I  am  sure,  be  a  full  measure  of  protection  to  your 
investments. 


[623] 


RECONSTRUCTION  OF  RAILROAD  CREDIT 

JOHN  E.  OLDHAM 
of  Merrill,  Oldham  and  Company,  Bankers,  Boston 

IN  discussing  the  railroad  problem  from  the  standpoint  of 
credit,  some  facts  are  so  obvious  that  they  need  only  be 
stated.  It  may  be  safely  assumed,  for  instance,  that  a  per- 
manent and  satisfactory  solution  of  the  problem  requires  that 
railroads  generally  be  placed  in  a  position  to  meet  the  transporta- 
tion needs  of  the  communities  which  they  serve;  that  the  de- 
velopment and  growth  of  the  country  will  necessitate  the  raising 
of  large  amounts  of  capital  to  be  expended  for  new  tracks,  ter- 
minals and  equipment;  that  railroad  earnings  must  be  adequate 
to  assure  the  maintenance  of  satisfactory  credit  and  that  issues 
of  new  securities  must  have  a  broad  and  ready  market.  It  may 
be  assumed  also  that  large  corporations  will  be  better  known  in 
the  financial  markets,  where  large  amounts  of  capital  are  avail- 
able, than  small  corporations  which  in  most  instances  will  be 
but  little  known  outside  the  localities  in  which  they  operate; 
that  the  larger  corporations  will  have  an  advantage  over  the 
smaller  corporations  in  raising  new  capital  even  though  each, 
in  its  financial  showing,  measures  up  to  the  same  standard  of 
credit. 

As  the  railroad  problem  is  primarily  a  problem  of  finance,  its 
solution  must  be  sought  along  lines  which  recognize  the  need  for 
corporations  of  sound  credit  and  for  corporations  also  with  abil- 
ity to  raise  new  capital  both  readily  and  economically. 

The  critical  condition  of  all  railroad  credit  for  a  long  time  be- 
fore the  government  assumed  control  of  the  transportation  sys- 
tems of  the  country  is  too  well  known  to  require  extended  com- 
ment. It  is  well  understood  that  even  the  credit  of  the  roads 
which  were  favorably  located,  well  managed,  and  conservatively 
capitalized,  had  become  greatly  depreciated  primarily  because 
the  margin  of  earnings  required  to  protect  dividend  payments 
had  become  so  small  that  discontinuance  of  payments  at  former 
rates  at  least  seemed  possible  if  not  probable  in  many  instances. 

It  is  also  understood  that  the  credit  of  other  roads  was  weak 
and  uncertain  because  of  over-capitalization,  and  in  some  cases 
even  though  capitalization  was  not  excessive  the  amount  of  stock 
was  too  small  and  the  amount  of  bonds  and  other  obligations 

[624] 


No.  4]  RECONSTRUCTION  OF  RAILROAD  CREDIT  113 

was  too  large.  Even  had  rates  been  sufficient  to  provide  an  ade- 
quate return  on  a  fair  and  reasonable  amount  of  capital,  the  dis- 
proportionate amount  of  stock  to  bonds  and  other  obligations 
would  still  have  left  these  railroads  without  sufficient  credit  to 
obtain  capital  on  satisfactory  and  economical  terms. 

The  credit  of  other  railroads  failed  because  of  the  unfavorable 
character  of  the  territory  served  and  the  impossibility  of  making 
rates  with  a  view  to  the  special  conditions  under  which  they 
operated. 

With  the  return  of  railroads  to  private  management  similar 
conditions  will  prevail  unless  corrected  by  remedial  legislation. 
All  of  these  situations  must  be  dealt  with  adequately  and  com- 
prehensively if  the  railroads  generally  are  to  have  sound  credit* 
and  are  to  be  made  self-sustaining. 

For  the  purpose  of  determining  the  relative  number  and  im- 
portance of  the  railroads  whose  credit  has  been  affected  by  the 
several  conditions  outlined  above,  the  railroads  of  the  country 
have  been  divided  into  three  groups. 

The  first  contains  the  larger  railroads  which  for  many  years 
have  paid  regular  dividends.  In  this  group  are  included  32  systems 
with  a  total  gross  operating  income  amounting  to  approximately 
60  per  cent,  of  the  gross  operating  income  of  all  the  railroads 
in  the  United  States. 

The  second  group  contains  the  larger  non-dividend-paying 
roads.  In  this  group  are  all  of  the  railroads  with  a  gross  operat- 
ing income  of  upwards  of  $10,000,000  each,  few  of  which  have 
paid  any  dividends  in  recent  years.  It  includes  24  systems  with 
a  total  gross  operating  income  amounting  to  approximately  30 
per  cent,  of  the  aggregate  earnings  of  the  railroads  of  the  United 
States. 

The  third  group  contains  the  remaining  systems,  the  small 
roads.  It  includes  approximately  100  Class  I  roads  with  earn- 
ings of  less  than  $10,000,000,  and  it  also  includes  upwards  of 
250  Class  II  roads  with  earnings  of  less  than  $1,000,000  and 
more  than  $100,000.  The  group  is  made  up  of  more  than  350 
individual  roads  but  the  aggregate  gross  operating  income  is  only 
10  per  cent,  of  the  total  of  the  country. 

As  the  dividend-paying  railroads  in  the  first  group  have  demon- 
strated their  ability  to  compete  with  each  other  under  the  same 
rates,  it  is  fair  to  assume  that  the  credit  of  these  roads  would  be 
restored  if  rates  were  adequate  to  provide  a  satisfactory  margin 

[625] 


114  RAILROAD  LEGISLATION  [Vol.  VHI 

over  dividends,  and,  if  investors  had  confidence  that  rates  would 
be  permanently  maintained  on  such  a  basis. 

A  comparison  of  the  statistics  relating  to  the  operation  of  the 
dividend-paying  roads  in  the  first  group  with  the  non-dividend- 
paying  roads  in  the  second,  covering  what  is  called  the  "test 
period"— the  three  years  ending  June  30,  1917— clearly  indicates 
that  the  average  traffic  conditions  are  much  the  same  in  each  case. 
The  business  is  made  up  of  substantially  the  same  proportion  of 
passenger  and  freight  traffic.     There  is  a  similarity  of  tonnage, 
products  of  mines,  forests,  agriculture,  manufactures,  and  other 
commodities  representing  about  the  same  proportionate  part  of 
the  total.    The  rate  per  ton  per  mile  and  the  rate  per  passenger 
per  mile  are  approximately  the  same.    With  maintenance  adjusted 
to  a  uniform  basis  the  cost  of  operation  is  relatively  the  same. 
Inasmuch  as  a  similar  volume  of  traffic  handled  at  the  same  rates 
produces  substantially  the  same  operating  income,  it  may  be  as- 
sumed that  the  plant  facilities— track,  equipment,  and  terminals — 
required   to   handle   the   business   are   likewise   much   alike   in 
quantity  and  character.    In  view  of  the  fact  that  the  cost  of  op- 
eration is  not  materially  different  in  the  two  cases — if  the  capi- 
talization were  proportionate  to  earnings — the  return  on  capital 
would  necessarily  be  substantially  the  same.     It  may  be  said 
further  that  the  relative  value  of  individual  properties  arrived 
at  by  using  the  market  value  of  securities,  under  normal  condi- 
tions, will  be  found  to  approximate  very  closely  results  obtained 
by  capitalizing  earnings. 

In  the  absence  of  definite  information  in  regard  to  the 
value  of  the  railroads  of  the  country  a  valuation  based  on 
earnings  or  market  value  of  securities,  where  traffic  conditions 
are  similar,  appears  to  offer  a  better  gauge  of  the  relative  value 
of  individual  properties  than  the  property  investment  accounts 
of  these  companies,  even  though  the  aggregate  of  these  accounts 
may  be  accepted  as  representing  the  best  basis  of  value  for  the 
railroads  considered  collectively  for  rate  making  purposes. 

The  average  conditions  under  which  the  railroads  in  these 
two  groups  operate  are  substantially  alike;  from  a  traffic  stand- 
point neither  group  is  "more  favorably  situated"  or  "less  favor- 
ably situated."  The  difference  is  largely  the  amount  and  form 
of  capitalization,  and  this  difference  is  reflected  in  the  statistics, 
especially  those  relating  to  fixed  charges  and  dividend  payments. 
Using,  for  example,  figures  which  cover  the  Western  and  South- 

[626] 


No.  4]  RECONSTRUCTION  OF  RAILROAD  CREDIT  115 

em  districts  only,  the  railroads  in  the  first  group  required  on  an 
average  a  sum  equivalent  to  approximately  23  per  cent,  of  gross 
earnings  to  pay  fixed  charges  and  to  maintain  dividends.  This 
total  was  apportioned  approximately  12  per  cent,  for  fixed  charges 
and  11  per  cent,  for  dividends.  The  railroads  in  the  second 
group,  on  the  other  hand,  while  paying  out  substantially  the 
same  proportionate  part  of  gross  earnings  for  fixed  charges  and 
dividends — the  sum  being  equal  to  22  per  cent. — nevertheless, 
required  21  per  cent,  for  fixed  charges  leaving  only  1  per  cent, 
for  dividends. 

For  the  purpose  of  illustration,  these  statements  have  been 
reduced  to  figures  in  a  comparison  of  the  dividend-paying  and 
non-dividend-paying  roads  in  the  Western  and  Southern  districts. 
The  roads  in  the  Eastern  district  are  not  included,  but  similar 
comparisons  produce  similar  results. 

Per  Cent  Which  Roads  in  This  Comparison  Bear  to  Whole  in 
Southern  and  Western  Districts 

Per  Cent. 

Per  Cent.  Gross 

Mileage  Earnings 

Group  1 58.8  63.5 

Group  2 29.5  27 

Total  of  Groups  1  and  2 88.3  90.5 

Per  Cent.  Gross  Operating  Income  Distributed 

Group  1  Group  2 

(16  roads)  (16  roads) 

Operating  Expenses  and  Taxes 41.9  44.5 

Maintenance 

(Adjusted  to  uniform  basis) 28.3  28.3 

Net  Earnings   29.8  27.2 

Other  Income 1.5*  1.5 

Total  Net  Earnings 31.3  28.7 

Fixed  Charges 12.3  20.8 

Dividends    10.5  1.1 

Total  Fixed  Charges  and  Dividends 28.8*  21.9 

Surplus 8.5  6.8 

*Allowance  has  been  made  for  the  difference  in  receipts  from  outside  in- 
come by  reducing  the  amount  of  outside  income  of  the  Group  1  roads 
from  6.2  to  1.5  to  compare  with  the  amount  received  by  the  Group  2 
roads  and  deducting  a  corresponding  amount  from  the  amount  of  charges 
and  dividends  proportionally  divided  between  the  two. 

[627] 


116 


RAILROAD  LEGISLATION  [Vol.  VIII 


20.9 
69.5  69.3 


Per  Cent,  of  Gross  Revenue 

Passenger  Revenue 2 1.3 

Freight   Revenue 

Miscellaneous   Revenue 9.2  9.8 

Passenger  Rate  per  Mile $.02040  $.02280 

Freight  Rate  per  Mile $.00806  $.00840 

Tons  per  Train 503  413 

Gross  Earnings'  per  Mile $11,309  $  9,591 

Classification  of  Tonnage 

Per  cent.   Per  cent. 

Agriculture 20  l/.l 

Animals    4  3-4 

Mines  39.8  39.4 

Forests    14-5  16 

Manufactures   14.3  1/ 

Miscellaneous  Commodities 2.2  2.5 

L.  C.  L.  Goods 5.2  4.6 


100.0        100.0 

Figures  for  operation  cover  test  period,  July  1,  1914  to  June  30, 
1917. 
Figures  for  tonnage  cover  year  ending  June  30,  1916. 

As  the  railroads  in  the  two  groups  operating  under  the  same 
rates,  with  a  valuation  or  capitalization  based  on  earnings,  would 
earn  substantially  the  same  return  on  their  investment  or  cap- 
italization, each  would  be  entitled  to  the  same  credit,  if  the 
capitalization  were  similarly  divided  between  stocks  and 
obligations.  With  adequate  rates  and  some  adjustment 
of  capitalization  on  the  part  of  the  railroads  in  the  second 
group,  the  credit  of  the  railroads  representing  approximately 
90  per  cent,  of  the  railroad^ business  of  the  country  would  be 
placed  on  the  same  credit  basis  and  on  such  a  basis  that  the 
securities  of  the  larger  systems  would  command  the  confidence 
of  and  be  attractive  to  investors. 

To  establish  the  credit  of  upwards  of  350  small  roads  by  any 
method  of  rate  making  presents  a  difficult  if  not  impossible 
problem,  if  the  roads  are  to  continue  to  operate  independently. 
These  roads  for  the  most  part  are  at  a  disadvantage  from  a 
traffic  standpoint  with  the  larger  systems  and  may  be  termed 
properly   "less  advantageously   situated."     They   occupy   a   less 

[628] 


No.  4]  RECONSTRUCTION  OF  RAILROAD  CREDIT  117 

favorable  field  for  operation  and  yet  are  obliged  to  handle  their 
business  on  a  basis  of  rates  made  more  largely  with  a  view  to 
the  conditions  surrounding  the  more  favorably  situated  roads. 
Attention  has  frequently  been  called  to  the  fact  that  rates  cannot 
be  made  with  a  view  to  the  specific  conditions  surrounding  the 
less  favorably  situated  railroads  which  represent  but  a  small 
part  of  the  transportation  systems  of  the  country  without  pro- 
viding too  generous  a  return  for  the  large  majority  of  roads 
which  are  more  favorably  situated.  This  has  frequently  been 
referred  to  as  the  problem  of  the  "weak"  and  "strong"  roads 
and  the  different  methods  of  meeting  this  difficulty  have  been 
an  essential  feature  of  most  of  the  plans  which  have  undertaken, 
to  deal  with  the  railroad  problem.  It  may  be  said  further  that 
even  if  rates  could  be  made  which  would  enable  these  small  com- 
panies to  make  a  satisfactory  financial  showing,  their  securities 
would  have  such  a  narrow  market  that  financing  would  be  dif- 
ficult and  expensive,  if  not  impossible  in  many  cases. 

The  proposal  made  in  some  of  the  plans — and  this  has  met 
with  some  favor — to  make  advances  to  weak  roads  from  a  fund 
accumulated  from  the  surplus  earnings  of  the  more  favorably 
situated  systems,  is  in  itself  an  acknowledgment  that  these  roads 
are  not  expected  to  be  placed  in  a  position  to  maintain  them- 
selves in  independent  operation. 

The  most  practical  plan  which  has  been  suggested  for  taking 
care  of  these  roads  in  such  a  way  that  the  territory  which  they 
serve  will  be  assured  of  adequate  railroad  facilities  is  by  merging 
the  smaller  with  the  larger  systems  with  which  they  have  natural 
traffic  relations. 

Consolidation  with  the  strong  systems  may  also  provide  the 
surest  and  most  effective  way  of  meeting  the  problem  of  the 
roads  whose  credit  is  poor  because  of  the  form  of  their  capital- 
ization. Consolidations  would  facilitate  the  reorganization  and 
adjustment  of  the  capitalization  of  these  companies  and  put  them 
in  a  position  to  obtain  the  capital  necessary  to  meet  the  require- 
ments of  the  territories  which  they  serve.  It  may  be  assumed 
that  these  mergers  would  take  place  on  a  basis  which  would  rep- 
resent fair  relative  values  and  in  the  process  of  consolidation 
capitalization  would  be  so  adjusted  that  the  credit  of  the  strong 
systems  would  not  be  impaired. 

A  brief  statement  covering  the  number  of  existing  railroad 
systems  which  operate  independently  will  show  that  a  substantial 

[629] 


118 


RAILROAD  LEGISLATION  [Vol.  VIII 


part  of  the  railroad  business  of  the  country  is  already  concen- 
trated within  a  relatively  few  systems  and  if  the  existing  large 
systems  were  used  as  a  basis  for  such  further  consolidations  as 
might  be  desired,  the  result  would  be  accomplished  without  ser- 
iously disturbing  present  relations.  The  railroads  of  the  United 
States  have  been  classified  by  the  Interstate  Commerce  Commis- 
sion as  Class  I  and  Class  II  roads.  The  Class  I  roads  include  all 
the  railroads,  177  in  number,  whose  gross  operating  income 
equals  or  exceeds  $1,000,000  annually.  The  roads  represent 
approximately  97  per  cent,  of  the  railroad  business  of  the  coun- 
try. The  Class  II  roads  include  all  the  railroads  whose  gross 
operating  income  is  over  $100,000  but  less  than  $1,000,000,  and 
while  larger  in  number,  they  represent  only  3  per  cent  of  the 
business.  Eighty-seven  of  the  177  Class  I  roads  are  controlled 
through  stock  ownership  by  45  systems.  The  earnings  of  the 
45  systems,  together  with  the  earnings  of  the  controlled  roads, 
amount  to  $3,210,256,842,  or  96  per  cent,  of  the  total  earnings 
of  the  Class  I  roads,  and  92.8  per  cent,  of  the  mileage. 

The  problem  of  further  consolidation  would  thus  narrow  down 
to  the  means  of  absorbing  the  numerous  small  systems  and  such 
further  mergers  as  might  be  desirable  and  necessary  among  the 
45  systems. 

A  careful  consideration  of  all  the  circumstances  which  are  in- 
volved in  meeting  the  large  financial  requirements  of  the  rail- 
roads leads  to  the  conclusion  that  railroad  credit  as  a  whole 
will  be  established  on  a  safer  and  more  satisfactory  basis,  and 
capital  will  be  made  more  certainly  available  and  at  less  cost,  by 
consolidating  existing  railroad  companies  into  a  few  large  compet- 
ing systems  along  the  lines  proposed  by  the  Cummins  Bill.  This 
method  has  received  the  endorsement  of  the  Transportation  Con- 
ference representing  the  United  States  Chamber  of  Commerce, 
and  the  principle  was  approved  by  the  Counsel  of  the  Association 
of  Railway  Executives  in  his  testimony  before  the  House  Com- 
mittee on  Interstate  and  Foreign  Commerce. 

A  policy  of  railroad  consolidation  along  these  lines  is  not  a 
new  policy;  it  is  a  policy  consistent  with  the  practices  which 
have  been  followed  in  developing  the  transportation  systems  of 
the  country  to  their  present  form.  All  the  large  railroad  systems 
represent  the  merging  of  many  railroads,  some  strong  and  some 
weak,  with  the  result  that  these  systems  represent  average  con- 
ditions and,  where  they  compete  in  the  same  territory,  show  aver- 

[630] 


No.  4]  RECONSTRUCTION  OF  RAILROAD  CREDIT  119 

age  operating  results.  The  consolidations  which  have  taken 
place  in  the  past,  for  the  most  part,  have  been  an  advantage  to 
all  interests  concerned.  By  this  means  railroad  service  has  been 
extended  and  improved  and  financing  has  been  more  economical 
than  if  the  various  railroads  constituting  these  systems  had  re- 
mained in  independent  operation  and  each  had  been  obliged  to 
finance  its  own  requirements.  Whatever  difference  of  opinion 
there  may  be  as  to  methods,  no  plan  will  prove  a  success  which 
does  not  further  strengthen  the  credit  of  the  strong  roads,  and 
establish  credit  for  the  roads  heretofore  weak  financially,  whether 
the  weakness  is  the  outcome  of  unfavorable  operating  conditions 
or  a  failure  to  observe  sound  standards  of  capitalization.  On  no 
other  basis  will  the  railroads  individually  and  as  a  whole  be  able 
to  meet  the  requirements  of  the  country  for  adequate  transpor- 
tation. 


[631] 


PENDING    CONGRESSIONAL    LEGISLATION    AS    AF- 
FECTING OWNERS  OF  RAILROAD  SECURITIES 

S.  DAVIES  WARFIELD 

President  National  Association  of  Owners  of  Railroad  Securities; 
President  The  Continental  Trust  Company,  Baltimore 

ON  November  12th  a  statement  appeared  in  the  press  signed 
by  the  chief  executives  of  organizations  of  railroad 
workers,  including  three  of  the  four  principal  brother- 
hoods. This  statement,  in  denouncing  the  labor  clauses  of  the 
Esch  Bill,  characterized  it  as  a  "conscienceless  betrayal  of  the 
public  interest;"  that  "it  validates  twenty  billion  dollars  of  rail- 
road securities,  at  least  eight  billions  of  which  is  water;"  that  it 
caters   to   "Big   Business"   and   that   generally   the   measure   is 

(t     •     •  J) 

VICIOUS. 

The  statement  continued:  "This  travesty  on  legislation  re- 
veals the  fundamental  weakness  of  all  schemes  to  return  the 
roads  to  their  former  owners.  The  fact  is  that  private  owner- 
ship of  the  means  of  transportation  has  broken  down.  .  .  ." 
That  "apparently  our  statesmanship  is  as  bankrupt  as  our  rail- 
roads. .  .  ."  That  "the  railroads  should  be  held  under  fed- 
eral control  for  at  least  two  years,"  and  in  respect  to  government 
ownership  it  said  that  "labor  is  willing  to  accept  the  sober  judg- 
ment of  the  American  voters  as  expressed  at  a  general  election." 

Esch  Bill  Stripped  of  Revenue  Provision 

Since  this  statement  was  made,  the  Esch  Bill  has  passed  the 
House  stripped  of  the  provision  which  the  Committee  of  the 
House  that  framed  the  bill  thought  would  enable  rates  to  be  made 
which  would  ensure  sufficient  revenue  properly  to  operate  the 
railroads.    The  defeated  section  read  thus : 

"In  reaching  its  conclusions  as  to  the  justness  and  reasonable- 
ness of  any  rate,  fare,  charge,  classification,  regulation,  or  prac- 
tice, the  Commission  shall  take  into  consideration  the  interest 
of  the  public  and  the  shippers,  the  reasonable  cost  of  maintenance 
and  operation  (including  the  wages  of  labor,  depreciation,  and 
taxes)  and  a  fair  return  upon  the  value  of  the  property  used 
or  held  for  the  service  of  transportation." 

Under  the  bill  as  amended  and  passed  the  inefficient  rate  laws 

[632] 


No.  4]  PENDING  CONGRESSIONAL  LEGISLATION  121 

stand  as  at  present  constituted,  with  the  wage  dispute  adjustment 
provision  incorporated  therein  demanded  by  the  chief  executives 
of  the  brotherhoods. 

The  failure  of  a  rate-making  formula  to  pass  the  House  sub- 
stantiates our  contention  that  the  Act  should  definitely  interpret 
what  a  "reasonable"  rate  means  by  naming  the  minimum  and 
provide  for  a  maximum  return  from  such  rates,  as  the  only  prac- 
tical legislative  solution  of  the  railroad  problem.  Definite  di- 
rections in  the  act  in  respect  to  these  essentials  are  as  necessary 
to  satisfy  the  demands  of  the  public,  the  apprehensions  of  the 
shippers  and  the  caution  of  Congress  as  it  is  to  be  certain  that  the 
railroads  will  be  enabled  to  give  adequate  service,  as  a  whole, 
and  finance  themselves.  To  state  that  rates  shall  be  made  that 
will  "produce  reasonable  return"  adds  nothing  to  the  bill  or  to 
the  present  law  that  has  not  been  considered  by  the  Commission 
in  the  past  in  making  rates  as  pointed  out  by  Commissioner 
Clark  at  a  hearing  before  the  House  Committee. 

The  specific  charge  in  respect  to  railroad  securities  made  in 
the  statement  by  the  organization  of  railroad  workers  referred 
to  requires  answer.  The  charge  is  that  the  Esch  Bill  (before 
amendment),  clearly  meaning  any  legislation  giving  financial 
protection,  "validates  approximately  twenty  billion  dollars  of 
railroad  securities,  at  least  eight  billions  of  which  is  water,  and 
directs  the  Interstate  Commerce  Commission  to  tax  the  Ameri- 
can people  through  an  increase  in  freight  and  passenger  rates 
to  pay  dividends  on  those  'shadow  dollars.'  " 

Any  such  characterization  of  railway  value  is  untrue  and  is 
but  one  of  many  evidences  of  a  deliberate  determination  by 
violent  terms  and  action  to  attempt  to  coerce  and  demoralize 
Congress  so  that  no  constructive  railroad  legislation  shall  pass. 
By  these  irresponsible  representations  as  to  values  and  denounce- 
ment of  the  Congress  where  they  say  "statesmanship  is  as  bank- 
rupt as  our  railroads,"  and  by  abusive  criticism  of  proposed  leg- 
islation inconsistent  with  their  own,  those  issuing  the  statement 
have  apparently  succeeded  in  defeating  the  meagre  financial  pro- 
visions in  the  Esch  Bill,  and  hope  to  destroy  the  enterprise  which 
employ  the  men  they  purport  to  represent  in  order  that  they 
may  gain  its  possession. 

The  reckless  charges  in  respect  to  the  value  of  the  securities 
of  the  railroads  are  but  a  repetition  of  similar  misstatements  in 
connection  with  railroad  legislation  which  for  months  has  been 

[633] 


122  RAILROAD  LEGISLATION  [Vol.  VIII 

before  committees  of  both  the  Senate  and  the  House  of  Represen- 
sentatives. 

Property  Accounts  Represent  Less  Than  Aggregate  Value 

The  property  investment  accounts  of  the  railroads  have  been 
under  the  close  supervision  of  the  Interstate  Commerce  Commis- 
sion only  since  1907,  yet  within  the  short  intervening  period  of 
twelve  years  the  records  show  that  more  than  six  billion  dollars 
of  cash  expenditure  has  been  made  on  the  properties  of  Class  I 
railroads,  over  one-third  of  the  seventeen  and  a  half  billion  dol- 
lars total  property  book  value  of  these  roads,  exclusive  of  inter- 
company securities  (as  of  the  test  period  1915-16-17).  I  am 
speaking  of  property  value  not  security  values  or  issues.  No 
well-informed  person  will  contest  the  statement  that  in  the  ag- 
gregate the  properties  and  equipment  devoted  to  the  public  use 
of  Class  I  railroads  (89  per  cent  of  the  total  mileage)  are  worth 
more  in  the  aggregate  than  the  seventeen  and  a  half  billion  dol- 
lars, as  shown  by  the  books  of  the  railroads. 

But  whether  this  be  true  or  not  true,  the  billions  of  alleged 
"water"  and  "shadow  dollars"  are  effectually  provided  against 
in  Section  6  of  the  Cummins  Bill,  now  awaiting  action  by  the 
Senate. 

The  importance  of  the  provisions  of  this  section  of  the  Cum- 
mins Bill  as  the  minimum  essential  to  the  continuance  of  the  de- 
velopment and  prosperity  of  the  country  cannot  be  too  strongly 
urged  upon  Congress,  upon  the  shipping  interests  and  the  public. 
It  now  stands  alone  between  a  successful  transportation  system 
privately  owned  and  operated,  and  a  government  system,  how 
operated  you  cannot  know. 

Fair  Value  of  Railroads  Taken  as  Basis  for  Return 
The  effect  of  Section  6  of  the  Cummins  Bill  is  to  provide 
that,  pending  actual  physicaPvaluations  of  all  railroad  properties, 
the  Interstate  Commerce  Commission,  taking  into  consideration 
all  the  elements  that  should  properly  be  considered,  shall  deter- 
mine the  "fair  value"  of  the  property  and  equipment  of  the  rail- 
roads, in  the  aggregate,  in  each  rate  group.  For  the  purpose  of 
determining  and  adjusting  rates  so  that  they  will  yield  a  living 
and  fair  return,  the  Commission  shall  group  the  roads  (as  they 
have  done  in  the  past  for  a  similar  purpose)  into  as  many  groups 
as  they  may  decide.  Upon  the  aggregate  amount  of  the  invest- 
ment in  or  "fair  value"  of  all  the  railroads  of  each  group  a 

[634] 


No.  4]  PENDING  CONGRESSIONAL  LEGISLATION  123 

level  of  rates  shall  be  established  that  will  yield  "as  nearly  as 
may  be"  5^2  per  cent,  on  this  aggregate  value,  plus  one-half  of 
1  per  cent,  at  the  discretion  of  the  Commission,  for  unproductive 
improvements,  which  in  the  case  of  those  roads  earning  over  6 
per  cent,  on  value  determined  as  stated — not  on  securities — shall 
not  be  capitalized  for  future  rate  making. 

Earnings  that  may  be  made  by  any  railroad  in  excess  of  the 
6  per  cent,  (on  value)  and  up  to  7  per  cent,  are  divided  one-half 
to  the  railroad  earning  them  as  incentive,  the  other  half  to  be 
used  as  a  national  fund  administered  by  a  government  au- 
thority in  the  interest  of  transportation  as  a  whole,  for  joint  ter- 
minals and  other  joint  facilities,  or  for  cars  and  equipment  to  be 
leased  to  roads  to  relieve  congestion,  but  not  to  be  capitalized  in 
future  rate  making.  Thus  there  is  a  division  of  excess  earnings 
beyond  the  given  reasonable  return  on  "fair  value,"  between 
those  who  use  the  railroads  and  those  who  own  them.  The 
one-half  of  the  excess  which  goes  to  the  road  earning  it  is  credited 
to  a  reserve  account  to  be  used,  under  specific  conditions,  to  en- 
able it  to  meet  financial  obligations  and  in  lean  years  to  provide 
against  deficiencies  which  might  impair  its  obligations  to  the 
public.  After  7  per  cent,  is  earned  by  any  road  the  ratio  of  divis- 
ion becomes  one-third  to  the  railroad  earning  it  and  two-thirds 
to  the  transportation  fund. 

Section  6,  Cummins  Bill,  Provides  Against  So-called 
"Watered  Securities" 

Under  Section  6  of  the  Cummins  Bill,  the  aggregate  value  of 
the  roads  of  the  respective  groups  is  taken.  Rates  are  based  on 
such  value,  without  respect  to  the  amount  of  securities  which 
may  have  been  issued  by  any  railroad.  Since  the  public  and 
shipper  would  pay  only  a  reasonable  return  on  the  value  of  each 
group  of  railroads  as  determined  by  public  authority  and  get 
back  part  of  what  they  pay  to  maintain  transportation  as  a  whole, 
in  the  use  of  the  facilities  purchased  from  the  general  transporta- 
tion fund  created  from  excess  earnings,  the  misrepresentations 
that  have  been  made  and  the  clamor  of  the  past  that  the  public 
pays  returns  on  false  investment  would  end.  If  this  section  of 
the  Cummins  Bill  becomes  the  law,  the  idle  talk  about  paying  or 
earning  "dividends"  or  a  return  on  "watered  securities"  and 
"shadow  dollars"  will  cease  and  private  ownership  and  operation 
will  be  permanently  established. 

[635] 


124 


RAILROAD  LEGISLATION  [Vol.  VIII 


Many  railroads  will  not  earn  as  much  as  the  S]/2  or  6  per  cent, 
on  their  individual  property  and  equipment  which  would  go  to 
make  up  part  of  the  aggregate  of  the  railroad  property  in  their 
respective  groups.  Rates  being  made  on  the  aggregate  value  of  all 
the  property  of  a  group,  each  railroad  earns  on  its  own  value 
as  much  as  it  can  secure  through  efficiency  in  operation  and  man- 
agement. So  a  railroad  that  is  overcapitalized  in  securities  suf- 
fers in  the  percentage  return  it  would  receive  on  such  securities 
because  the  return  is  based  on  the  "fair  value"  of  its  property 
and  equipment.  No  greater  incentive  could  be  given  to  each 
railroad  than  to  require  that  its  earnings  from  rates  made  on  the 
aggregate  value  of  all,  shall  depend  entirely  upon  its  own  ef- 
ficiency, and  not  upon  a  guaranteed  amount  to  each  or  a  govern- 
ment guarantee  security.  Those  roads  that  earn  over  6  per  cent, 
on  the  value  of  their  property  have  the  incentive  to  make  the 
earnings  in  excess  thereof  as  great  as  possible,  because  they  re- 
tain one-half  of  such  excess  between  6  and  7  per  cent,  and  one- 
third  after  7  per  cent.  So  there  is  no  guarantee  of  any  descrip- 
tion, directly  or  indirectly,  given.  Rates  are  made  that  would 
yield  the  stated  return  on  the  value  of  the  transportation  system 
as  a  whole  and  no  two  roads  will  necessarily  receive  the  same 
percentage  return,  because  each  earns  on  its  own  value  what  it 
can  from  rates  made  for  all,  the  leveling  is  accomplished  through 
the  regulation  of  earnings  in  excess  of  the  percentage  return. 

Director-General  Hines'  Prediction 
The  Esch  Bill  now  passed  by  the  House  does  not  contain,  nor 
did  the  unamended  bill  contain,  any  permanent  financial  provision 
for  the  railroads.  It  does  not  nor  did  the  original  bill  provide 
for  the  regulation  of  excess  earnings,  essential  to  produce  a  uni- 
formly efficient  service  throughout  our  transportation  system. 
Such  regulation  becomes  necessary  because  railroads  that  serve 
dense  traffic  territory  can  earn  more  from  a  rate  than  those  serv- 
ing sparsely  settled  territory,  and  the  latter  constitute  the  ma- 
jority of  the  railroads  (Class  I).  You  cannot  make  rates  that 
will  suit  all  the  railroads  alike.  A  rate  level  that  will  enable  the 
great  majority  of  railroads  to  live  must  necessarily  produce  more 
earnings  to  roads  serving  dense  traffic  territory  than  such  roads 
are  entitled  to  have  and  more  than  they  would  receive  but  for  the 
necessities  of  the  majority.  The  Commission  in  the  past  has 
hesitated  to  allow  rates  that  will  give  to  a  few  favorably  situated 

[636] 


No.  4]  PENDING  CONGRESSIONAL  LEGISLATION  125 

roads  inordinate  earnings  which  the  shippers  and  public  served 
by  these  roads  have  repeatedly  declared  they  will  not  stand  for. 
Yet  such  a  result  is  unavoidable  under  present  laws  if  regard  is 
to  be  had  for  the  life  of  the  majority  which  constitute  those 
roads  not  so  favorably  situated  as  the  few.  The  result  has  been 
that  the  Commission  could  not  make  rates  that  were  necessary  to 
the  majority,  so  the  railroads  and  the  public  have  both  suffered 
the  consequences.  Should  this  continue?  If  it  does,  Director- 
General  Hines'  prediction  will  come  true  when  he  said  that — 

The  plan  of  private  management  necessarily  involves  the  idea  that  if 
one  or  many  railroad  companies  happen  to  be  exceptionally  prosperous, 
the  entire  exceptional  profits  remain  with  the  railroad  company.  This 
condition,  continues  Mr.  Hines,  will  make  the  public  always  fear  or  suspect 
that  it  is  being  exploited  through  the  transportation  service  for  the  benefit 
of  private  capital  and  will  lead  to  continual  insistence  upon  the  railroads 
being  operated  exclusively  for  the  public  benefit  through  government 
ownership  and  operation. 

Mr.  Hines  recognized  the  necessity  of  excess  earnings  regu- 
lation. 
Crux  of  Railroad  Problem  Solved  by  Section  6,  Cummins  Bill 

At  a  hearing  before  the  House  Committee  which  framed  the 
Esch  Bill,  in  reply  to  a  member  of  the  Committee  who  after  re- 
peating substantially  the  provision  relating  to  rates  then  in  the 
proposed  bill,  whether  such  provision  would  change  the  past 
methods  of  the  Commission  for  making  rates,  Commissioner 
Clark,  a  member  of  the  Interstate  Commerce  Commission  and 
Chairman  of  their  Legislative  Committee,  stated  that  "it  would 
not  change  it  in  substance,  because  all  of  those  things  are  now 
considered."  In  like  manner,  Commissioner  Clark,  when  ques- 
tioned upon  the  advisability  of  providing  in  the  act  a  fixed  per- 
centage return  on  value  ascertained  by  public  authority  which,  as 
we  have  shown,  carries  with  it  regulation  of  excess  earnings, 
stated,  "it  would  avoid  endless  controversies  (and)  it  would  put 
an  end  to  interminable  discussion  and  argument." 

There  is  no  higher  type  of  man  than  the  men  who  occupy  re- 
sponsible positions  in  the  service  of  the  railroads.  From  the 
locomotive  engineer  to  the  man  who  walks  the  track  I  do  not  be- 
lieve one  of  them  if  fully  informed  would  look  for  fairer  protec^ 
tion  to  themselves  and  the  public  than  is  provided  by  Section  6 
of  the  Cummins  Bill.  Shippers  and  the  public  are  vitally  con- 
cerned in  this  section,  for  unless  adequate  revenue  is  provided 

[637] 


126  RAILROAD  LEGISLATION  [Vol.  VIII 

for  the  railroads,  now  only  to  be  had  through  definite  require- 
ments of  a  fixed  return  with  a  division  and  regulation  of  earn- 
ings in  excess  thereof  substantially  as  Section  6  provides,  their 
railroad  service  will  break  down,  for  another  opportunity  will 
not  be  afforded  them  for  securing  constructive  legislation,  and 
Government  ownership  will  be  forced  upon  them. 

Whether  all  the  existing  railroads  shall  be  ultimately  forced 
to  consolidate  into  twenty-five  or  thirty-five  or  two  or  three  larger 
companies,  or  whether  consolidations  are  made  permissive  (which 
we  favor),  it  will  require  years  of  valuation,  bargaining,  and 
litigation  in  the  case  of  the  former,  and  considerable  time  in  the 
case  of  the  latter,  so  this  is  not  the  immediate  issue.  The  crux 
of  this  problem  lies  in  whether  the  principles  laid  down  in 
Section  6  of  the  Cummins  Bill  are  to  be  enacted  into  law  as  the 
only  means  to  save  the  railroads  on  the  termination  of  the  pro- 
posed six  months'  extension  of  the  standard  return;  or  whether 
they  shall  be  turned  back  to  their  owners  loaded  with  debt,  many 
of  them,  their  traffic  disrupted  as  the  consequence  of  the  neces- 
sary unification  plans  of  the  government  incident  to  the  war, 
with  nothing  to  rely  upon  but  the  same  regulating  laws  and  pro- 
cedure of  the  past,  nothing  definite  upon  which  they  can  depend. 
Any  legislation  embodying  substantially  what  is  now  on  the 
statute  books,  though  it  may  contain  added  verbiage,  will  fail 
unless  it  empowers  the  Commission  to  adjust  rates  through 
the  regulation  of  excess  earnings  of  a  comparatively  few  rail- 
roads, and  to  a  fair  and  reasonably  fixed  initial  return  to  all. 

Section  6  of  the  Cummins  Bill  is  a  constructive  step  in  recog- 
nizing that  the  impossible  conditions  which  existed  in  the  past 
between  the  shipper  and  the  carrier  must  be  stopped  that  the 
business  of  transportation  may  be  carried  on  in  a  business  fash- 
ion. The  mandate  by  Congress  to  the  Commission  comes  as  near 
producing  an  automatic  adjustment  of  rates  as  possible,  and 
will  avoid  the  "endless  controversies"  (and)  "interminable  dis- 
cussion," as  characterized  by  Commissioner  Clark. 

Securities  Association  Largest  Organized  Group  of 
Owners  in  Existence 
The  National  Association  of  Owners  of  Railroad  Securities 
represents  the  largest  single  organized  group  of  railroad  securi- 
ties in  existence.    They  come  nearer  as  an  active  force  being  the 
owners  of  the  railroads  than  any  other  single  organization.     It 

[638] 


No.  4]  PENDING  CONGRESSIONAL  LEGISLATION  127 

is  not  unreasonable  for  some  of  them  at  least  to  think  that  they 
should  be  listened  to  in  respect  to  legislation  by  the  operating 
heads  of  railroads  that  have  sold  them  the  securities  they  own, 
particularly  when  such  legislation  is  financial.  They  find  them- 
selves opposed  by  a  few  executives  who,  in  the  name  of  their 
Executives  Association,  beginning  with  opposition  to  our  efforts 
in  securing  adequate  protective  clauses  in  the  standard  form  of 
government  contract  when  the  roads  were  taken  over,  are  now  in 
open  hostility  to  the  one  thing  the  Securities  Association  chiefly 
stands  for,  namely,  the  principles  involved  in  Section  6  of  the 
Cummins  Bill.  The  owners  of  the  great  majority  of  the  out- 
standing securities  of  all  the  railroads  find  themselves  in  the  un- 
fortunate position  of  being  called  upon,  through  this  Association, 
to  defend  their  securities  from  attacks,  when  they  had  at  least 
the  right  to  expect  that  the  presidents  of  the  railroads  that  issued 
such  securities  should  cooperate  to  secure  the  legislation  the 
owners  believe  to  be  necessary.  But  these  few  executives  in  the 
name  of  and  exerting  the  influence  of  their  "Association  of  Rail- 
way Executives,"  though  many  executives  of  the  member  roads 
are  not  in  sympathy  with  such  action,  are  attempting  to  defeat 
the  purposes  of  Section  6  of  the  Cummins  Bill,  the  only  con- 
structive railroad  legislation  offered  in  years,  and  thereby  find 
themselves  unable  to  offer  assistance.  Their  campaign  in  some 
instances  is  as  misleading  as  that  of  the  framers  of  the  state- 
ment attacking  the  Esch  Bill,  and  they  are  lending  them  assistance 
in  establishing  conditions  which  will  not  only  work  injury  to 
those  they  are  supposed  to  represent,  but  will  eventually  lead  to 
government  ownership.  Their  attitude  is  illustrated  in  a  letter 
(among  others  received)  from  one  of  the  prominent  railroad 
presidents  of  the  country.  He  asserts  that  the  Executives  As- 
sociation is  "dominated  by  certain  interests  who  are  largely  re- 
sponsible for  the  past  and  present  difficulities  of  the  railroads. 
In  the  present  instance  the  Bourbons  are  running  to  form." 

The  Association  believed  the  time  had  come  when  all  that 
could  be  expected  is  a  fair  initial  return  with  sufficient  in  ad- 
dition above  that  return  to  preserve  the  incentive  essential  to 
efficient  service.  Inherent  traffic  and  territorial  difficulties  de- 
manded that  the  regulation  of  these  properties  must  extend  to 
the  earnings  in  excess  of  this  fair  return.  In  the  light  of  the  ex- 
perience of  the  past,  we  wish  to  see  an  end  put  to  the  "intermin- 
able discussions"  as  to  rates  that  have  occurred  in  the  past  before 

[639] 


128 


RAILROAD  LEGISLATION  [Vol.  VIII 


the  Commission,  and  the  owners  of  the  railroads  should  be  will- 
ing to  make  sacrifices  to  secure  it. 

Dangers  in  the  Situation 

Millions  of  citizens,  depositors  in  mutual  savings  banks  and 
owners  of  policies  in  the  great  mutual  life  insurance  companies, 
are  represented  through  their  companies  as  members,  as  are 
also  those  represented  by  investing  institutions  generally,  all 
owning  vast  amounts  of  railroad  securities  and  are  vitally  con- 
cerned in  the  pending  legislation. 

The  propaganda  being  spread  throughout  the  country  aimed 
at  the  defeat  of  all  railroad  legislation,  unless  a  partnership  is 
created  by  Act  between  the  brotherhoods  and  the  government 
under  government  ownership,  means  that  all  the  political  force 
they  can  muster  will  be  used  against  members  of  Congress  who 
decline  to  accede  to  their  demands. 

Representatives  in  legislative  bodies  should  be  brought  to  feel 
that  they  are  not  to  be  left  to  be  beaten  because,  without  fear 
or  favor,  they  fulfill  their  obligations  of  office.  Unless  these  con- 
ditions are  recognized  our  institutions  will  be  seriously  impaired. 
There  is  every  indication  that  the  public  expects  to  see  the  rail- 
road problem  solved  and  settled  permanently.  Anything  less 
than  the  requirements  of  Section  6  of  the  Cummins  Bill  will  not 
meet  their  expectations. 

The  rank  and  file  of  the  employees  of  the  railroads,  when  made 
conversant  with  actual  conditions,  cannot  sanction  the  methods 
being  used  to  defeat  constructive  legislation  which  will  solve  the 
railroad  problem,  with  due  regard  for  all  interests  and  classes. 
The  rank  and  file  should  know  that  in  the  division  of  excess  earn- 
ings our  original  proposal  was  that  any  excess  over  the  fixed 
initial  return  should  be  divided  one-third  to  the  railroad  earning 
such  excess,  one-third  to  a  fund  in  the  interest  of  railroad  em- 
ployees and  one-third  to  the"hational  fund  created  to  be  spent 
in  the  interest  of  transportation.  The  Brotherhood  chiefs  op- 
posed this,  they  did  not  favor  the  employees  having  a  participa- 
tion in  earnings  under  private  ownership.    So  this  was  abandoned. 

The  time  has  arrived  when  the  trustees  of  those  representing 
the  great  mutual  investing  institutions  should  have  their  depen- 
dents know  the  extent  to  which  this  propaganda  and  these  pur- 
poses have  reached,  and  what  it  means  to  the  thirty-three  million 
holders  of  life  insurance  policies,  to  the  millions  of  depositors  in 

[640] 


No.  4]  PENDING  CONGRESSIONAL  LEGISLATION  129 

savings  banks,  to  individual  investors  and  others.  We  live  under 
a  partisan  political  government,  and  unless  those  who  represent 
these  millions  of  owners  meet  the  situation  by  giving  support  to 
those  public  servants  who  strive  to  do  their  duty,  a  small  minority 
of  the  electorate,  through  the  propaganda  now  being  spread 
throughout  the  country,  will  bring  about  the  destruction  not  alone 
of  the  rights  of  property,  but  the  very  foundation  of  our  Govern- 
ment. 


[641] 


THE  PRICE  OF  PRIVATE  OWNERSHIP 

PIERPONT  V.  DAVIS 
Vice-President  National  City  Company  of  New  York 

ABOUT  ten  days  ago  the  organization  with  which  I  am 
connected  offered  a  million  and  a  half  of  the  ten  year 
6%  bonds  of  a  strong  industrial  corporation.  In  less 
than  one  hour  the  issue  was  absorbed  and  we  had  orders  which 
we  could  not  fill  for  another  million.  Last  July  a  syndicate  in 
which  we  joined  offered  an  issue  of  ten  year  6%  obligations  of 
one  of  the  few  railroad  companies  which  has  prospered  during 
Federal  control.  After  five  months'  effort  the  bonds  are  not  yet 
entirely  sold,  while  the  price  has  fallen  below  that  which  the 
railroad  company  itself  secured.  On  the  first  day  of  November 
an  absolute  first  mortgage  railroad  bond,  generally  conceded  to 
be  perfectly  good,  matured  and  yet  was  not  paid  off  in  cash  but 
was  forcibly  extended  for  three  years  because  of  the  bankers' 
conviction  that  investors  would  not  purchase  at  this  time  a  re- 
funding issue. 

Is  it  not  something  of  an  anomaly  that  a  5%  railroad  stock, 
such  as  the  New  York  Central,  which  has  paid  dividends  for  50 
years,  should  sell  at  a  discount  of  25  per  cent,  at  the  same  time 
that  an  industrial  stock  like  Baldwin  Locomotive,  receiving  no 
dividends,  sold  at  a  premium  of  50  per  cent. ;  and  when  an  8% 
industrial,  Underwood  Typewriter,  sells  at  180,  and  a  7%  rail, 
Great  Northern,  sells  at  85? 

From  my  knowledge  of  the  bond  market,  I  believe  that  owing 
to  the  present  attitude  of  the  investor,  the  successful  flotation  of 
new  issues  is  impossible  to  all  but  a  very  limited  number  of  rail- 
way companies.  This  preference  on  the  part  of  investors  for  the 
securities  of  industries  not  subject  to  public  regulation  is  one  of 
the  most  pronounced  characteristics  of  the  market  at  the  present 
time. 

Opinions  differ  as  to  the  causes  of  this  discrimination.  It 
has  been  alleged  that  the  depreciation  of  railroad  credit  has  been 
caused  by  statements  made  by  railroad  executives  themselves  and 
that  the  Interstate  Commerce  Commission  has  no  responsibility 
therefor.    To  believe  this  is  to  confuse  cause  and  effect.     I  do 

[642] 


No.  4]  THE  PRICE  OF  PRIVATE  OWNERSHIP  131 

not  think  railroad  credit  has  been  talked  down  any  more  than  I 
believe  we  can  talk  it  up  now.  A  railroad  company's  perform- 
ances outweigh  a  railway  president's  speeches  when  credit  is  in 
the  balance.  There  is  nothing  artificial  in  the  deterioration  of 
railroad  credit.    It  reflects  the  insufficiency  of  net  revenues. 

In  the  ten  years  ending  in  1910  the  carriers  of  the  country 
earned  an  average  of  5.25  per  cent,  on  their  investment.  Only  in 
the  post-panic  years  1904  and  1908  did  the  return  sink  below  5 
per  cent.  With  the  exception  of  1908,  very  little  mileage  was  in  the 
hands  of  receivers.  The  willingness  of  investors  to  purchase  more 
than  one  and  a  half  billion  of  new  railroad  stocks  at  par.  or 
higher  is  striking  evidence  of  the  public  confidence  then  prevail- 
ing. With  the  adverse  rate  decision  of  1910  confidence  began  to 
wane.  In  the  next  five  years  the  return  on  railway  investment 
averaged  only  4^2  per  cent,  and  during  1914  and  1915  was  very 
little  better  than  4  per  cent.  Few  partnership  risks  were  accepted 
by  investors  in  this  period  and  many  thousand  miles  of  road  were 
operated  by  receivers.  After  1915  came  the  rapid  increase  in 
traffic,  making  the  results  of  1916  and  1917  unusually  good. 
But  investors,  realizing  that  those  earnings  were  due  to  war  con- 
ditions, properly  enough,  had  little  faith  in  their  continuance. 
So  while  it  is  true  that  the  rentals  which  the  companies  are  guar- 
anteed under  Federal  control  are  based  on  the  highest  average 
earnings  ever  received  in  any  three-year  period,  railroad  credit 
is  not  responsive ;  the  distrust  created  by  the  low  level  of  earn- 
ings in  the  pre-war  years  cannot  be  expunged  by  two  years  of 
good  earnings  since  they  resulted  from  an  abnormal  state  of 
trade. 

But  4^2  per  cent,  represents  affluence  in  comparison  with  the 
present  earnings  of  the  carriers.  Were  the  Government  to  return 
the  properties  to  their  owners  today  without  making  provision 
for  an  extension  of  the  Federal  guarantees,  or  for  an  increase  in 
rates,  over  87,000  miles  of  railroad  would  presumably  pass  into 
the  hands  of  receivers  since  these  roads  are  not  now  earning  their 
fixed  charges.  Nearly  seven  billions  of  capitalization  would  be 
involved  in  the  crash.  The  dividend  distribution  on  the  stocks  of 
other  companies,  aggregating  one  billion,  one  hundred  million  dol- 
lars, would  forthwith  be  reduced  or  passed.  Fortunately,  Con- 
gress seems  fully  awake  to  this  danger  and  is  prepared  to  furnish 
a  bridge,  in  the  form  of  the  extension  of  the  Federal  guarantees, 
until  firmer  ground  is  reached. 

[643] 


132  RAILROAD  LEGISLATION  [Vol.  VIII 

Another  factor  has  aggravated  the  difficulties  caused  by  low 
earning  power.  Money  was  much  cheaper  prior  to  1910  than 
it  has  been  since.  The  Pennsylvania  Railroad  Company,  for 
example,  borrowd  $100,000,000  in  1915  at  about  Sl/2  per  cent.  In 
1917  it  paid  4^  per  cent.,  and  in  1918  approximately  5^4  per  cent. 
Very  few  companies  have  borrowed  long  term  funds  since  1911 
as  cheaply  as  Al/2  per  cent.,  and  yet,  since  the  average  productivity 
of  the  total  railway  investment  was  only  about  Ay2  per  cent,  be- 
tween 1911  and  1915,  it  follows  that  the  owners  of  the  properties 
were  actually  penalized  for  placing  new  facilities  at  the  public 
service. 

The  railroad  problem  presents  many  sides,  but  underlying  the 
whole  difficulty  is  the  question  of  credit.  During  the  history  of 
transportation  there  have  been  times  when  the  relations  between 
the  railroads  and  the  shipper  and  between  the  public  and  the 
roads  have  been  none  too  cordial,  but  the  identity  of  interests  is 
today  well  understood.  It  must  not  be  forgotten,  however, 
that  this  identity  of  interests  does  not  exist  in  the  case  of  the 
investor.  If  he  is  not  satisfied  with  the  treatment  he  receives  he 
will  seek  other  fields.  While  he  has  already  furnished  the  money 
for  enormous  additions  and  betterments  to  the  railway  plant  we 
want  him  to  supply  a  great  deal  more. 

It  is  often  said  that  the  railroads  need  a  billion  dollars  a  year ; 
the  latest  estimate,  I  observe,  is  two  billions.  We  will  keep  our 
thinking  straighter  if  we  say  that  it  is  the  public  which  needs  these 
billions  put  into  the  railways.  Failure  to  obtain  new  capital  will 
react  more  disastrously  on  the  public  than  it  will  on  the  carriers. 

How  can  cordial  relations  be  reestablished  between  the  rail- 
roads and  the  investor  ?  The  demand  for  new  capital  throughout 
the  world  is  now,  and  will  be  for  some  years  to  come,  in  my 
judgment,  in  excess  of  the  supply.  Competition  for  it  promises 
to  be  so  keen  that  if  we  expect  the  railroads  to  secure  their  share 
we  must  be  more  than  merely  just;  we  must  be  generous  in  our 
treatment  of  them.  This  is  the  first  and  most  important  step  in 
reestablishing  relations.  I  believe  this  can  only  be  effected  by 
assuring  the  roads  net  revenues  of  not  less  than  6  per  cent,  on 
their  investment.  While  an  average  of  5%  per  cent.,  as  I  have 
already  pointed  out,  met  the  situation  a  few  years  ago,  it  will  not 
be  liberal  enough  today  when  we  take  into  consideration  the  pres- 
ent increased  cost  of  capital,  as  well  as  the  need  of  overcoming  the 
hesitation  or  distrust  of  the  investor.    To  give  the  carriers  6  per 

[644] 


No.  4]  THE  PRICE  OF  PRIVATE  OWNERSHIP  133 

cent,  would  mean  the  addition  to  net  revenues  of  slightly  more 
than  $100,000,000  over  the  average  of  the  test  period.  Twelve 
times  this  sum  has  been  added  to  the  pay  of  railway  employees 

since  the  Government  assumed  control. 

It  is  far  easier  to  injure  credit  than  to  restore  it,  so  we  must 
not  think  that  merely  a  friendly  act  of  legislation  is  going  to 
heal  instantly  the  injuries  that  have  accumulated  in  the  past  nine 
years.  Indeed,  some  critics  believe  that  credit  is  injured  so 
mortally  that  only  a  government  guarantee  endorsed  on  securities 
will  restore  it  to  life.  With  this  view  I  do  not  concur.  I  do  not 
think  the  investor  demands  a  guarantee  but  he  will  expect  that 
those  who  determine  how  much  his  railroad  shall  receive  for 
what  it  sells  shall  also  accept  responsibility  for  what  it  costs  to 
produce  it.  There  have  been  too  many  instances  of  running  rail- 
roads with  bondholders'  or  shareholders'  money.  The  cost  of 
railroad  operation  should  be  paid  for  by  those  who  use  railroad 
facilities,  not  by  those  who  built  them.  If  an  arbitration  results 
in  an  award  of  increased  wages  it  ought  to  mean  increased  rates, 
not  decreased  dividends. 

Senator  Cummins  fully  appreciates  that  any  remedial  legisla- 
tion must  tender  the  investor  reasonable  security  of  principal 
and  interest,  and  an  important  section  of  his  bill  addresses  itself 
to  that  end.  To  accomplish  this  purpose,  however,  I  think  cer- 
tain changes  are  essential.  Its  rule  of  rate  making  requires  the 
Commission  to  adjust  rates  so  that  the  carriers  shall  earn,  as 
nearly  as  may  be,  Sy2  per  cent,  on  the  aggregate  value  of  their 
properties.  It  should  be  distinctly  encouraging  to  the  investor 
to  have  the  Interstate  Commerce  Committee  of  the  Senate  agree 
that  some  increase  in  net  earnings  is  not  only  warranted 
but  necessary.  It  is  my  considered  opinion,  already  expressed, 
that  the  return  should  be  not  less  than  6  per  cent.  Furthermore, 
such  return,  until  the  physical  valuations  have  been  completed, 
ought  to  be  measured,  as  it  always  has  been,  on  the  property 
investment  accounts. 

I  am  seriously  disturbed  by  the  proposal  of  compulsory  con- 
solidations. It  will  result  in  seven  years  of  uncertainty,  which 
means  more  costly  and  more  difficult  financing.  It  will  de- 
teriorate the  credit  of  the  strong  roads  and  not  help  the  credit  of 
the  weak.  Inequality  of  earning  power  has  dictated  this  pro- 
posal, since  on  a  given  rate  structure  one  company  may  have 
a  grossly  excessive  income  while  another  may  be  bankrupt.    But 

[645] 


134 


RAILROAD  LEGISLATION  [Vol.  VIII 


the  bill  intends  to  correct  this  inequality  by  a  division  of  excess 
earnings.  Why  then  the  necessity  of  compulsory  consolidations? 
I  personally  cannot  conceive  of  much  durable  satisfaction  from 
the  work  of  a  few  experts  commissioned  to  redraw  the  railway 
map  of  the  United  States. 

The  next  few  years  will  be  crucial  to  the  railroads.  Their 
credit  needs  every  fortification.  Senator  Cummins'  Bill  requires 
each  carrier  to  set  aside  one-half  of  its  earnings  between  6  per 
cent,  and  7  per  cent,  for  a  reserve  fund  of  its  own,  the  balance 
reverting  to  a  general  contingent  fund.  I  venture  to  suggest  that 
in  the  interest  of  reestablishing  credit  there  should  be  no  division 
of  excess  earnings  until  each  carrier  has  built  up  its  full  indi- 
vidual reserve  fund  contemplated  by  the  bill,  that  is,  5  per  cent, 
on  the  value  of  its  property. 

The  Esch  Bill,  as  introduced,  concerns  itself  chiefly  with  im- 
provement in  the  machinery  of  regulation.  Necessary  as  such 
improvements  are  they  will  never  of  themselves  restore  credit. 
In  the  form  in  which  the  bill  passed,  those  few  features  in  it  that 
were  calculated  to  encourage  the  investor  have  been  carefully 
stricken  out. 

I  wonder  how  many  people  realize  that  this  problem  of  railroad 
credit  is  a  public  question  of  transcending  importance.  Failure 
to  reestablish  credit  at  this  juncture  means  government  owner- 
ship. The  price  of  private  ownership  is  a  fair  return  on  the 
investment. 

"No  country,"  Mr.  Acworth  warns  us,  "has  ever  nationalized 
its  railways  as  a  result  of  deliberately  weighing  the  respective 
advantages  and  disadvantages  of  public  and  private  ownership." 
We  have  reached  the  parting  of  the  ways.  But  whatever  the  de- 
cision, it  is  of  far  greater  moment  to  the  people  of  the  United 
States  than  it  is  to  those  holding  railroad  securities. 


[646] 


ESSENTIALS    OF    A    SOUND    POLICY    AS    TO    THE 

INVESTOR 

WILLIAM  L.  RANSOM, 

Former  Counsel  for  the  New  York  Public  Service  Commission  for 

the  First  District 

OTHER  speakers  have  presented  a  wealth  of  statistical  in- 
formation concerning  the  railroad  problem  and  the  rela- 
tion of  the  investor  to  it.  On  no  other  public  occasion 
outside  the  hearings  of  the  Congressional  Committees  have  the 
facts  of  the  matter  been  so  comprehensively  and  clearly  brought 
together.  Perhaps  the  most  helpful  thing  I  can  undertake  at  this 
juncture  will  be  to  try  to  formulate  some  of  the  fundamental 
principles  which  must  be  taken  into  account  in  all  efforts  to  reach 
a  solution  of  the  present  problem. 

The  future  of  railways,  privately  owned  and  operated  under 
thorough  public  regulation,  depends  in  large  part  on  the  ability  of 
such  a  regime  to  command  the  confidence  of  the  investing  public. 
New  capital  must  be  had  in  larger  quantities  for  new  construc- 
tion and  refinancing.  The  future  of  the  railways  is  thus  deeply 
involved  in  the  broader  and  more  basic  problem  of  the  status  of 
regulated  industry  in  the  United  States.  The  operating  experience 
of  the  railroads  during  the  years  immediately  preceding  the  war 
establishes  that  more  than  half  a  billion  dollars  of  new  capital 
will  be  needed  annually  by  the  American  railroads.  For  a  number 
of  years  immediately  ahead,  especially  in  view  of  the  present 
price  level,  the  necessary  new  capital  is  more  likely  to  exceed  than 
to  fall  below  a  billion  dollars  per  year.  The  railways  must  keep 
pace  with  the  life  and  needs  of  the  public  they  serve;  they  must 
grow  or  stagnate ;  growth  means  new  capital ;  and  new  capital 
depends  on  conditions  of  investment.  You  can  compel  a  man  to 
pay  in  taxes  the  deficits  incurred  in  railway  operation  or  even 
the  principal  and  interest  of  loans  from  the  public  treasury  for 
new  capital  for  railway  and  public  utility  enterprises,  but  you  can- 
not compel  him  to  Jnvest  his  money  in  an  enterprise  compelled 
to  do  business  under  conditions  which  arouse  his  distrust  and 
destroy  his  confidence. 

In  the  industrial  world  recent  events  have  emphasized  the  fun- 
damental American  principle  that  in  conflicts  between  employees 

[647] 


136  RAILROAD  LEGISLATION  [Vol.  VIII 

and  employers  in  basic  industries,  the  rights  and  interests  of  the 
public  are  paramount  to  those  of  contestants  on  either  side.  The 
right  of  the  great  public  to  be  adequately  and  continuously  served 
is  put  in  the  first  place.  In  the  field  of  railway  and  public-utility 
service,  likewise,  there  has  lately  been  at  work  a  sharp  crystalli- 
zation of  opinion  to  similar  effect — a  recognition  that  above  and 
beyond  all  efforts  to  capitalize  the  social  unrest  and  force  a  change 
of  ownership,  the  essential  thing  is  that  these  vital  facilities  shall 
function  to  maximum  efficiency  and  that  injustice  shall  not  be 
done  to  those  whose  abilities  have  perfected  these  enterprises  and 
whose  monies  are  serving  the  public  through  them. 

We  have  had  in  the  United  States  nearly  ten  years  of  deliber- 
ate, well-planned  warfare  to  intimidate  investors  from  furnishing 
the  needed  new  capital  for  railway  and  other  public-service 
projects.  In  some  instances,  this  crusade  has  been  the  by-product 
of  a  narrow  but  zealous  view  of  public  rights  as  to  franchise- 
holding  companies ;  in  other  cases,  it  has  been  the  work  of  men 
who  believed  that  manifestations  of  extreme  hostility  to  the  own- 
ers of  these  enterprises  would  be  so  popular  as  to  lead  naturally 
to  political  preferment.  In  many  instances,  however,  the  cam- 
paign of  terrorism  and  affrightment  of  investors  has  been  inspired 
by  those  who  realized  that  if  private  funds  would  not  furnish  the 
requisite  capital  for  new  construction  and  new  financing,  the 
treasury  of  the  government  will  of  necessity  be  resorted  to,  and 
that  the  most  effective  step  towards  governmental  acquisition 
of  all  basic  utilities  would  be  to  force  existing  properties  into  the 
bankruptcy  court  or  upon  the  bargain  counter. 

In  the  debates  which  have  taken  place  in  the  National  Congress, 
and  in  much  of  the  more  recent  discussion  as  to  the  plight  of 
utilities  in  our  states  and  cities,  there  has  been  discernible  what 
may  be  termed  a  new  realization  of  the  relationship  of  the  in- 
vestor to  the  whole  problem  of  public  service.  If  we  are  to  avoid 
and  withstand  the  wholesale  Socialization  of  the  railway,  light, 
heat,  power  and  traction  enterprises  of  the  country,  conditions 
must  be  restored  which  will  attract  private  capital  freely,  normally 
and  adequately,  under  proper  safeguards  and  guarantees,  again 
into  this  important  field.  Investors  and  the  general  public  may 
well  grasp  the  situation  and  join  hands  in  dealing  with  it.  The 
insidious  campaign  which  has  made  private  capital  unwilling  to 
risk  further  outlays  in  the  railway  and  public  utility  field  has  had 
consciously  for  its  objective  the  compelling  of  resort  to  govern- 

[648] 


No.  4]  SOUND  POLICY  AS  TO  THE  INVESTOR  137 

mental  funds  instead,  and  the  clubbing  of  the  present  owners  into 
willingness  to  sell  outright  on  a  bargain  basis.  In  what  I  am  say- 
ing in  this  regard,  I  am  in  no  way  discussing  the  merits  of  the 
suggestions  from  time  to  time  made  in  American  cities  that  a 
particular  utility  or  utilities,  according  to  the  conditions,  might 
be  advantageously  acquired  by  the  municipality  on  a  basis  award- 
ing just  compensation  to  the  investors.  That  is  a  business  ques- 
tion, to  be  answered  in  each  community  according  to  its  local 
conditions.  Public  ownership  on  such  a  basis  may  be  wise  or 
unwise,  but  in  either  event  it  has  no  such  sinister  aspect  as  the 
agitation  to  which  I  now  refer. 

In  any  program  of  effort  to  restore  conditions  under  which  pri- 
vate capital  will  again  flow  naturally  and  adequately  into  railway 
and  public  utility  enterprises,  there  are,  I  think,  certain  funda- 
mentals of  policy,  which  may  be  briefly  stated  and  commented 
upon  as  follows: 

(1)  A  recognition  and  enforcement  by  public  authority  of  the 
corporate  right  to  earn  such  a  rate  of  return  as  will  meet  operat- 
ing expenses,  enable  the  system  as  a  whole  to  be  kept  in  first- 
class  condition,  and  attract  new  capital  into  the  enterprise  as 
needed. 

In  fixing  the  rates  to  be  charged  by  a  railway  or  other  public 
service  company,  the  effect  upon  the  willingness  of  capital  to 
finance  needed  new  construction  is  too  often  lost  sight  of,  in  the 
effort  to  keep  rates  as  low  as  possible.  A  rate  which  meets  oper- 
ating expenses  and  yields  a  return  barely  beyond  the  borders  of 
confiscation,  may  not  be  adequate  for  the  life  of  the  enterprise.  If 
the  conditions  of  investment  in  railways  and  other  public  utilities 
are  kept  too  irksome  and  hazardous,  the  cost  of  new  capital  be- 
comes too  high,  and  this  in  turn  adds  heavily  to  the  costs  of 
operation.  The  public  inflicts  harm  and  expense  on  itself  by 
failing  to  deal  justly  with  the  investor. 

At  the  present  time,  private  capital  may  embark  in  unregulated 
industries  with  less  risks  and  fewer  embarrassments  and  earn  a 
larger  rate  of  return  than  may  ever  be  countenanced  in  public 
service  enterprises.  It  is  no  accident  that  the  security  issues  of 
concerns  selling  candy,  automobile  tires,  and  talking-machines, 
or  running  "chain  stores,"  have  become  more  popular  on  the 
Exchanges  than  the  best  of  our  railroad  and  public  utility  issues. 
New  stock  of  a  railroad  corporation  could  hardly  be  sold  at  all. 
To  attract  private  capital  into  the  public  service  field  at  all,  it 

[649] 


138  RAILROAD  LEGISLATION  [Vol.  VIII 

is  necessary,  first  of  all,  to  eliminate  or  reduce  some  of  the 
hazards,  along  lines  I  shall  later  mention ;  but  it  may  also  be  neces- 
sary to  revise  some  of  the  earlier  concepts  of  what  constitutes  a 
fair  and  adequate  rate  of  return  for  public  service  enterprises. 

In  computing  a  fair  rate  of  return  on  investments  in  this  field, 
an  unfounded  analogy  is  too  commonly  drawn  with  the  statutes 
regulating  the  rates  of  legal  interest  in  the  several  states,  and  the 
conclusion  is  reached  that  a  rate  of  return  on  public  utility  invest- 
ment is,  perforce,  adequate  if  it  approximates  the  figure  at  which 
interest  on  certain  types  of  loans  would  become  usurious.  The 
need  for  making  the  rate  of  return  such  as  to  attract  new  capital 
readily,  as  needed,  in  the  level  of  prices  and  economic  conditions 
to  which  the  war  has  given  apparent  permanency,  is  not  heeded. 
Yesterday's  6  per  cent  return  has  no  drawing  power  under  today's 
conditions.  If  6  per  cent  was  not  too  high  in  1900  or  1913, 
10  or  12  per  cent  is  required  now.  As  the  Supreme  Court  of  the 
United  States  said  a  few  weeks  ago : 

It  is  a  matter  of  common  knowledge  that,  owing  principally  to  the 
world  war,  the  costs  of  labor  and  supplies  of  every  kind  have  greatly  ad- 
vanced. *  *  *  And  it  is  equally  well  known  that  annual  returns  upon 
capital  and  enterprise  the  world  over  have  materially  increased,  so  that 
what  would  have  been  a  proper  rate  of  return  for  capital  invested  in  gas 
plants  and  similar  public  utilities  a  few  years  ago,  furnishes  no  safe 
criterion  for  the  present  or  for  the  future. 

If  our  public  utility  enterprises  are  to  live  and  render  a  one 
hundred  per  cent  service  to  the  public,  then  the  governmental 
authority — legislative,  executive  and  judicial — must  recognize 
and  enforce  the  utilities'  right  to  a  rate  of  return  which  will  draw 
capital  into  this  field  as  needed.  Reasonable  rates  must  be  fixed 
by  public  authority,  and  the  companies  permitted  and  encouraged 
to  earn  all  they  can  under  those  rates.  Anything  else  takes  away 
the  incentives  to  good  management. 

(2)  A  cessation  of  arbitrary  legislative  interference  along 
lines  of  fixed,  flexible  rater,  applied  within  areas  or  to  classes  of 
service  uniformly  without  regard  to  conditions. 

In  whatever  public  authority  undertakes  to  do  respecting  the 
rates  of  railroads  and  other  public  service  corporations,  the  con- 
cept of  flexibility  must  go  hand  in  hand  with  adequacy.  Rates 
must  be  readily  readjustable  for  good  cause  shown — upward  as 
readily  and  courageously  as  downward — whenever  the  facts  war- 
rant. There  is  no  way  of  "getting  something  for  nothing"  from 
a  public-service  corporation,  over  any  considerable  period  of  time. 
The  patron  must  pay  for  the  service;  the  investor  must  pay  for 

[6S0] 


No.  4]  SOUND  POLICY  AS  TO  THE  INVESTOR  139 

it,  for  the  taxpayer  must  pay  for  it ;  or  all  three  must  pay  in  part. 
Unless  someone  pays  adequately,  the  service  stops.  If  the  patron 
does  not  pay  adequately,  the  investor  soon  "takes  his  losses"  and 
withdraws,  either  leaving  the  taxpayer  or  the  patron  to  pay  the 
cost  or  the  two  to  divide  it  between  them.  The  usual  suggestion 
is  that  the  public  treasury  shall  in  some  manner  furnish  the  capi- 
tal and  assume  the  mounting  deficits,  and  the  usual  experience  has 
been  that  paying  the  deficits  by  taxes  makes  transportation  cost 
more.  You  can  commandeer  new  capital  by  taxation,  whether  the 
enterprise  is  given  a  fair  chance  or  not,  but  if  you  wish  voluntary 
investment  of  private  capital  the  conditions  must  be  made 
attractive. 

For  many  years  there  has  been  building  in  this  country  an  elab- 
orate mechanism,  State  and  Federal,  for  forcing  railroad  and  pub- 
lic utility  rates  downward.  This  was  in  a  period  of  declining 
costs  of  operation  per  unit  of  service  rendered.  Industry  has  now 
experienced  for  five  years  a  period  of  rising  costs,  and  those  costs 
are  still  rising,  but  the  mechanism  which  availed  to  force  rates 
down  has  failed  dismally,  in  many  of  the  states,  to  raise  rates  flex- 
ibly so  as  to  keep  revenues  adequate  and  the  investor  safe.  As  a 
means  of  keeping  rates  adequate  and  reasonable  in  a  time  of  rising 
costs,  the  machinery  of  public  control,  for  the  most  part,  broke 
down  in  the  emergency.  It  has  failed  to  protect  either  the  in- 
vestor or  the  public.  This  has  been  true  of  the  Interstate  Com- 
merce Commission  and  many  of  the  State  Commissions  alike.  Is 
it  surprising  that  the  investor  has  been  affrighted  from  the  field  ? 

The  worst  aspect  of  the  problem  of  keeping  rates  adequate — 
neither  too  high  nor  too  low — has  proved  to  be  the  fixed  legisla- 
tive rate,  born  of  some  political  exigency  and  applied  without 
regard  for  consequences.  In  many  instances,  the  Legislature  has 
left  the  situation  such  that  the  Commission  appointed  for  the  pur- 
pose of  regulating  rates  as  well  as  service,  has  no  power  to 
authorize  an  adequate  rate,  even  when  conditions  cry  out  for 
increase. 

The  inflexible  rate,  fixed  by  legislative  act  on  an  arbitrary  basis 
and  kept  in  force  regardless  of  changed  conditions,  is  the  terror 
of  the  investor  asd  a  downright  menace  to  good  public-utility 
service. 

(3)  Clarification  of  the  bases  of  return  upon  investment,  so 
as  to  ensure  that  no  theoretic  concepts  and  calculations  can  im- 
pair the  investor's  right  to  rates  based  upon  the  property  invest- 

[651] 


140  RAILROAD  LEGISLATION  [Vol.  VIII 

ment  devoted  to  the  public  service,  through  adherence  to  any 
theoretic  claim  that  the  quantum  of  investment  in  a  railroad  sys- 
tem or  a  public  utility  plant  becomes  automatically  less  the  longer 
it  serves  the  public,  until  it  is  finally  wiped  out  altogether  at  the 
behest  of  some  estimated  "table  of  lives"  of  detached  units. 

Time  will  not  permit,  and  the  present  occasion  does  not  war- 
rant, an  extended  discussion  of  the  questions  of  law  and  applied 
economics  involved  in  the  oft-heard  claim  that  property  devoted 
to  the  public  service  should  be  subjected  to  a  "theoretical  depre- 
ciation" which  pares  and  whittles  away,  year  by  year,  the  in- 
vestor's outlay  and  his  right  to  receive  a  reasonable  return  upon 
the  whole  thereof. 

I  may,  however,  express  the  view  that  the  most  effective  factor 
in  the  whole  campaign  to  intimidate  the  investor  and  drive  him 
from  the  railroad  and  public-utility  field,  has  been  the  insidious 
doctrine  of  "expiring"  investment  or  property  value.  In  itself 
it  has  been,  and  will  remain,  sufficient  to  deter  investors  from 
risking  new  monies  in  a  field  subject  to  such  a  confiscatory  con- 
cept, until  it  is  generally  rejected.  Nevertheless,  the  statute  under 
which  the  valuation  of  railway  property  has  been  in  progress  has 
been  construed  to  give  sanction  to  this  concept. 

The  idea  may  be  roughly  illustrated  in  this  way :  Investors  lay 
out  $1,000,000  in  building  a  railroad  addition  or  a  public  utility 
plant.  They  expect  a  return  of  7  per  cent  or  iy2  per  cent 
thereon,  over  and  above  operating  expenses  and  the  upkeep  of 
the  property,  and  rates  are  fixed  accordingly.  If,  after  the  prop- 
erty has  been  in  operation,  such  a  rate  has  been  charged,  and  such 
a  return  received,  for  several  years,  the  question  of  the  fixation  of 
new  rates  by  a  regulatory  commission  arises,  and  the  new  rates  are 
made  such  as  to  yield  thereafter  a  return  on  a  property  invest- 
ment of  only  $600,000,  and  the  quantum  of  investment  is  fixed 
accordingly,  it  is  obvious  that  something  has  been  done  by  the 
commission  to  wipe  out  and  obliterate  $400,000  of  investment  in 
the  property,  and  confiscation  to  that  extent  has  taken  place  in 
the  guise  of  law.  That  this  is  done,  in  disregard  of  actualities,  on 
a  theoretical  estimate  that  particular  units  in  the  property  had  a 
"life"  of  only  ten  years  and  that  at  the  end  of  four  years,  four- 
tenths  of  that  "life,"  and  so  of  the  property  "value,"  had  "ex- 
pired," leaving  only  six-tenths  of  "life"  and  "value"  "unimpaired," 
does  not  alter  the  consequences  to  the  investor.  The  result  is  a 
progressive  destruction  of  his  investment  outlay,  and  he  may  be 

[652] 


No.  4]  SOUND  POLICY  AS  TO  THE  INVESTOR  141 

pardoned   for  preferring  a  field  of   enterprise  where  no   such 
scheme  of  minimizing  his  investment  is  in  vogue. 

The  bases  of  sound  rate-making  are,  I  think,  clear,  and  their 
practical  application  needs  to  be  defined  and  insisted  upon.  The 
rate  chargeable  by  a  railroad  or  utility  should  be  adequate : 

(1)  To  defray  all  operating  expenses — the  cost  of  service. 

(2)  To  provide  for,  as  a  part  of  operating  costs,  the  main- 
taining of  the  system  and  property  in  good  condition,  furnish 
renewals  and  replacements,  and  cover  the  diminution  of  cap- 
ital account  through  property  withdrawn  from  service — thus 
keeping  the  property  in  first-class  operating  condition  and  the 
quantum  of  investment  unimpaired. 

(3)  Over  and  above  these  current  costs,  to  yield  the  investor 
a  reasonable  rate  of  return  upon  his  property  investment  in  the 
enterprise — his  unimpaired  investment — so  that  what  he  put  into 
the  project  may  remain  in  it  and  his  right  to  earn  a  return  upon 
all  of  it  may  continue,  in  the  absence  of  some  ultimate  liquidation. 
Until  the  investor  gets  his  money  back  from  the  enterprise,  in 
some  form  other  than  that  of  the  payment  to  him  of  the  annual 
return,  he  must  be  regarded  as  entitled  to  receive  a  return  cal- 
culated upon  his  aggregate  outlay — what  he  is  out  of  pocket  be- 
cause his  money  is  in  this  enterprise — and  no  countenance  can  be 
given  to  the  concept  that  his  investment  is  less  merely  because  it 
has  continued  to  serve  the  public  for  some  years.  No  man's  in- 
vestment is  progressively  destroyed  by  his  receiving  from  year 
to  year  a  payment  representing  a  return  on  the  investment.  Nor 
does  its  duration  affect  its  amount  adversely.  The  principal  of 
the  money  he  has  loaned  to  the  enterprise  is  not  extinguished  or 
pared  down  by  perennial  payments  of  a  return  thereon.  The 
right  to  earn  a  return  on  the  full  quantum  of  the  investment  con- 
tinues until  the  investment  itself  is  liquidated  or  repaid. 

Under  present-day  operating  conditions  and  with  the  broad 
powers  of  the  regulatory  commissions  over  plant  and  equipment, 
the  endeavors  of  the  executives  of  a  railway  or  public  utility 
enterprise  are  to  maintain  it  in  100  per  cent  operating  condition, 
and  to  make  repairs,  replacements  and  renewals  whenever  ad- 
visable to  that  end.  This  is  done  as  a  current  charge  out  of  oper- 
ating expenses,  and  the  plant  is  thus  continuously  renewing  itself. 
Particular  parts  of  units  may  wear  or  break ;  units  may  become 
inadequate  or  obsolete ;  but  the  plant  goes  on,  and  is  kept  abreast 
of  operating  needs,  and  has  virtually  the  same,  and  often  even 

[653] 


142  RAILROAD  LEGISLATION  [Vol.  VIII 

greater,  productivity  and  efficiency,  years  after  its  operation  began 
and  years  after  the  process  of  continuing  renewal,  repair  and  re- 
placement began.  The  integrity  of  the  capital  investment  is  thus 
maintained,  and  the  plant  itself  is  kept  physically  good  to  the 
extent  practicable  or  economically  possible.  Looking  at  the  plant 
or  railway  system  at  any  given  time,  certain  outlays  would  be 
found  necessary  to  make  the  plant  or  system  100  per  cent  phys- 
ically good — things  which  would  be  done  in  the  ordinary  course 
of  repairs  and  renewals,  and  things  which  it  would  hardly  pay  to 
do,  because  the  conditions  to  be  repaired  are  so  casual  and  incon- 
sequential as  not  to  detract  from  operating  efficiency.  The  full 
investment  remains  in  the  property,  however,  and  the  investor  is 
entitled  to  a  return  upon  the  full  amount  thereof  until  his  invest- 
ment has  been  repaid  him. 

In  order  to  feel  assured  of  a  square  deal,  the  investor  needs  to 
know,  with  considerable  certainty,  the  capital  sum  upon  which  a 
return  will  be  computed,  in  any  rate-revision  by  public  authority. 
He  needs  to  know  that  the  company  will  be  allowed  to  earn  a 
fair  rate  on  the  capital  put  in  by  him  until  such  time  as  that  capital 
is  returned  to  him.  There  is  no  need  now  for  uncertainty  or 
indefiniteness  about  these  bases  of  action.  For  years  the  railroads 
and  the  utilities  have  been  subjected  to  accounting  systems  under 
which  outlays  are  fully  recorded,  capital  accounts  are  closely 
scrutinized,  units  and  quantities  and  prices  are  known,  and  au- 
thentic data  is  available  for  the  bases  of  sound  and  just  action  in 
rate  matters. 

(4)  A  constructive  and  cooperative  attitude  respecting  the 
issuance  of  securities  for  new  construction  and  re-financing. 

To  bring  the  investor  back  into  the  railway  and  public-utility 
field  with  full  confidence,  there  is  need  for  a  helpful  and  non- 
legalistic  attitude  on  the  part  of  the  regulative  commissions,  in 
proceedings  for  authority  to  issue  stocks  and  bonds  for  capital 
purposes,  including  re-financing.  For  a  number  of  years,  new 
construction  by  railways  and  utilities  has  been  held  to  a  minimum, 
as  a  part  of  a  war-time  program,  and  it  has  been  deemed  gener- 
ally impracticable  to  undertake  flotations  of  securities  for  any 
purpose  in  this  field,  except  where  maturing  obligations  have  left 
no  alternative.  Needed  extensions  have  been  long  deferred,  and 
applications  for  approval  of  new  security  issues  have  all  but  dis- 
appeared from  commission  calendars.  Perhaps  as  a  result  of  this 
condition  we  have  lost  sight,  for  a  time,  of  the  practical  conse- 

[654] 


No.  4]  SOUND  POLICY  AS  TO  THE  INVESTOR  143 

quences  of  the  course  taken  by  the  state  authorities  in  acting  upon 
proposed  security  issues.  The  time  is  at  hand,  however,  when 
this  phase  of  regulatory  power  must  be  squarely  faced,  because  it 
bears  vitally  upon  the  question  whether  new  capital  can  be  had 
from  private  sources.  The  era  of  "wild-cat"  and  speculative 
financiering  in  the  public-service  field  is  far  behind  us;  the  day 
of  "watered"  or  inflated  issues  of  securities  by  railway  and  other 
public-utility  corporations  is  happily  past,  in  nearly  all  of  the 
states.  The  issuance  of  securities  by  public-service  companies, 
under  the  authority  of  state  tribunals,  during  the  past  decade,  has 
in  most  instances  been  preceded  by  rigorous  and  minute  inquiry 
to  see  to  it  that  bona  fide  capital  purposes  were  represented  -and 
that  an  adequate  amount  of  money  or  property  was  received  by 
the  companies  as  consideration  therefor.  The  certification  of  the 
security  issue  by  the  state  commission  has  been,  as  it  should  be, 
an  assurance  and  protection  to  the  investor;  but  instances  have 
not  been  lacking  where  the  attitude  of  the  commission  was  so 
exacting  and  inflexible  as  to  bar  the  way  to  businesslike  financing 
or  re-financing.  The  difficulty  has  been  more  often  one  of  pro- 
cedure and  of  intellectual  predisposition  than  of  substance;  but 
the  delay,  the  deterrents,  the  tendency  to  do  "cheese-paring,"  and 
the  reluctance  to  act  readily  upon  the  obvious  actualities  of  a  busi- 
ness situation,  have  operated  to  create  oftentimes  an  atmosphere 
which  the  investor  prefers  to  keep  out  of  when  he  can. 

The  temper  of  the  times  in  nowise  suggests  a  return  to  the  days 
of  unregulated  issuance  of  securities.  Particularly  if  the  commis- 
sions would  fulfill  their  proper  responsibility  for  the  allowance  of 
a  fair  return  upon  the  property  investment  whose  capitalization 
they  sanction,  the  official  scrutiny  or  security  issues  would  be  a 
great  boon  and  safeguard  to  the  bona  fide  investor.  There  is, 
however,  need  for  reason,  accommodation,  common-sense  regard 
for  realities,  and  a  little  breadth  of  view,  in  the  procedural  han- 
dling of  security  issues  by  state  tribunals. 

The  practical  needs  of  the  situation  may  perhaps  be  pointed 
by  the  comment  of  the  Illinois  countryman  who  went  to  Mr.  Lin- 
coln to  consult  him  regarding  marital  infelicities.  After  listening 
to  a  narrative  which*  covered  some  twenty  years  of  domesticity, 
marred  often  by  conflict,  Mr.  Lincoln  ventured  the  view  that  the 
facts  stated  would  hardly  sustain  a  suit  for  divorce.  "Good 
heavens,"  replied  the  prospective  client,  "I  do  not  want  a  divorce; 
what  I  want  is  a  little  more  freedom  on  lodge  nights !" 

[655] 


144  RAILROAD  LEGISLATION  [Vol.  VIII 

(5)  A  better  adjustment  of  the  relationship  between  company 
management  and  the  various  instrumentalities  of  public  regula- 
tion. 

I  do  not  believe  that  the  investor  will  be  disposed  to  supply 
again  the  new  capital  for  needed  facilities  of  transportation,  light, 
heat  and  power,  except  as  the  relationship  between  the  company 
management  and  the  various  officials  and  bodies  imposing  regula- 
tory requirements  is  brought  to  a  basis  better  defined  and  more 
harmonious.  There  is  need  for  adjustment  and  definition,  on  both 
sides ;  mistakes  have  been  made,  on  both  sides ;  but  the  present 
situation  leaves  the  definite  feeling  that  various  public  agencies 
have  been  given  drastic  powers  over  both  his  outlay  and  his  earn- 
ings, and  that  he  and  his  investments  are  too  often  torn  to  tatters 
in  a  conflict  between  the  commissions  and  the  company  officers, 
over  matters  which  he  does  not  fully  understand,  beyond  the  point 
that  public  officers  have  been  vested  with  a  power  to  do  him  harm 
from  which  the  best  efforts  of  directorates  and  executives  cannot 
altogether  protect  him. 

Regulation  of  a  thorough-going  character  has  come  to  stay,  and 
the  public  interest  has  come  to  be  recognized  as  a  general  partner 
in  very  public-utility  enterprise.  No  mandates  of  a  regulatory 
tribunal  are  required  to  give  to  the  public  interest  a  voice  or  a 
vote  in  the  conduct  of  the  affairs  of  the  average  large  enterprise 
of  today.  Subject  to  the  qualification  that  men  of  differing  expe- 
rience may  differ  widely  in  their  judgments,  a  real  desire  to  serve 
the  public  acceptably  is  now  the  rule  rather  than  the  exception, 
and  the  regulatory  tribunals  are  called  upon  to  review  and  correct 
divergencies  of  judgment  rather  than  perversity  of  purpose. 

In  recognizing,  however,  that  public  control  through  suitable 
agencies  is  an  essential  part  of  any  plan  of  public-utility  operation 
through  private  enterprise,  and  that  cooperation  must  be  had 
between  company  and  commission,  there  is  need  also  for  recog- 
nition of  the  delicate  and  drastic  power  reposed  in  the  public 
agency.  Power  to  fix  the  price  charged  for  the  company's  product 
and  power  to  impose  requirements  which  add  to  the  cost  of  pro- 
ducing the  service  rendered,  involves  a  far-reaching  control,  not 
only  over  the  investor's  earnings  from  the  capital  he  is  devoting 
to  the  public  service,  but  even  over  the  security  and  permanency 
of  the  investment  itself.  In  ways  that  attempted  enforcement  of 
the  constitutional  guarantees  may  not  be  able  to  forestall,  regula- 
tion may  inflict  a  virtual  confiscation.  So  the  investor  may  be 
pardoned  if  he  is  predisposed  to  be  wary  about  putting  more  of 

[656] 


No.  4]  SOUND  POLICY  AS  TO  THE  INVESTOR  14S 

* 

his  money  into  enterprises  so  drastically  supervised,  at  a  time 
when  there  is  such  a  demand  for  money  in  industries  subject  to 
no  such  control  over  selling-price,  security  issues,  and  the  prop- 
erty investment  itself. 

Thus  there  is  plainly  a  need  that  the  commissions  shall  be  made 
up  of  men  of  the  broadest  experience  and  open-mindedness  of 
view,  and  that  they  shall  be  assured  tenure,  salaries,  rank,  and 
status  of  aloofness  from  political  and  financial  entanglements,  so 
that  their  position  and  qualifications  may  correspond  to  those  of 
judges  of  the  highest  courts  of  the  state.  Furthermore,  there  is 
need  for  a  simplification  and  concentration  of  supervisory  powers. 
Far  too  many  public  officials  and  bodies  are  vested  with  power  to 
affect  adversely  the  earnings  and  properties  of  railroads  and  other 
utilities.  From  a  score  of  uncoordinated  public  instrumentalities 
come  a  multitude  of  directions,  adding  to  the  complexity  and  cost 
of  doing  business,  and  subtracting  from  the  revenues.  "Too  many 
cooks"  spoil  the  investment ;  there  is  need  for  a  more  unified 
regulation. 

For  example,  if  the  government  requires  a  utility  to  pay  taxes 
on  a  given  quantum  of  property  investment,  it  should  readily,  and 
at  all  hazards,  secure  to  the  company's  investors  rates  permitting 
an  adequate  return  on  at  least  that  quantum  of  property.  Often- 
times the  value  fixed  for  tax  purposes  may  fall  far  below  the  total 
property  investment  on  which  the  company  has  a  right  to  earn  a 
return,  but  the  spectacle  should  be  ended  of  one  set  of  govern- 
mental officers  trying  to  establish  the  highest  possible  value  for 
the  company's  property  as  that  on  which  the  company  should  pay 
taxes,  and  another  set  of  officials  trying  to  prove  that  the  same 
property  has  little  or  no  value  at  all  in  a  rate  proceeding,  and  both 
sets  of  officials,  and  several  others,  trying  to  prevent  the  company 
from  earning  anything  at  all  on  either  the  highest  or  the  lowest 
value  claimed  by  any  of  the  public  authorities. 

Again,  if  the  government  subjects  the  finances  and  operations 
of  a  public-service  company  to  a  constant  and  inquisitorial  super- 
vision and  analysis,  in  the  form  of  a  uniform  system  of  accounts 
and  closely  scrutinized  reports  rendered  under  penalty,  the  operat- 
ing data  thus  brought  together  under  public  scrutiny  ought  to  be 
recognized  as  the  aVailable  basis  for  official  action  in  favor  of, 
as  readily  as  against,  the  company,  and  those  who  have  required 
the  company  to  spend  much  time  and  money  in  complying  with 
these  regulatory  requirements  ought  not  to  be  permitted  to  deny 
the  company  the  benefits  of  such  compliance  in  good  faith. 

[657] 


WHAT  WARREN   S.  STONE  THOUGHT  IN   1911 

SLASON  THOMPSON. 
Director  Bureau  of  Railway  News  and  Statistics,  Chicago 

I  FIND  myself  unable  to  agree  with  Mr.  Warfield  in  his  pro- 
posal to  confiscate  the  net  operating  income  of  roads  earn- 
ing above  six  or  any  other  per  cent.  The  earning  power  of 
all  roads  in  a  given  region  is  taken  into  consideration  in  fixing  the 
reasonable  and  legal  rate,  and  generally  the  most  successful  roads 
have  the  greatest  weight  in  arriving  at  that  rate.  The  rate  once 
legally  established,  the  extent  of  the  net  return  should  be  left  to 
the  efficiency  of  the  management  in  earning  it.  If  there  is  to  be 
any  diversion  of  net  income  from  the  road  earning  it,  it  surely 
should  not  be  based  on  a  minimum  return  of  six  per  cent  but  on 
fifteen  or  twenty  per  cent  or  some  figure  beyond  which  Congress 
decrees  that  net  profits  in  any  business,  railway,  banking  or 
otherwise,  coming  within  its  purview,  are  excessive.  But  under 
any  circumstances  I  do  not  believe  in  robbing  Peter  to  pay  Paul, 
no  matter  how  rich  Peter  may  be  nor  how  poor  and  deserving 
Paul  may  be.  As  rates  come  out  of  the  public,  the  graded  income 
tax  for  the  public  chest  would  seem  to  be  the  means  of  making 
Peter  contribute  his  share  to  the  common  weal. 

Will  a  net  return  of  six  per  cent,  think  you,  attract  new  capital 
to  the  risks  of  an  industry  where  the  excess  over  that  is  subject 
to  seizure  for  the  common  good  ?    I  trow  not. 

On  the  way  down  here  I  thought  that  anything  I  might  have  to 
say  at  this  conference  would  count  little  toward  the  settlement 
of  the  vexatious  problem  confronting  the  people  of  the  United 
States,  but  that  words  of  truth  and  soberness  spoken  by  Warren 
S.  Stone,  Grand  Chief  of  the  Brotherhood  of  Locomotive  Engi- 
neers, in  the  calm  past  might  carry  more  weight  now  than  they 
did  eight  years  ago.  So  I  brought  along  a  reprint  of  his  speech 
before  the  National  Civic  Federation  at  its  annual  meeting  in 
1911,  a  few  passages  from  which  I  wish  to  submit  for  your 
consideration.    They  need  no  other  introduction. 

"Recently,"  said  Mr.  Stone,  "the  papers  were  filled  with  the 
statements  made  by  a  new  star  that  had  arisen  in  the  labor  world. 
'The  railroads  can  save  a  million  dollars  a  day.'  Think  of  it! 
Three  hundred  and  sixty-five  millions  a  year!     When  a  man 

[658] 


No.  4]  WHAT  WARREN  S.  STONE  THOUGHT  IN  igu  147 

comes  forward  with  such  a  startling  statement  as  that  made  by 
Mr.  Brandeis,  we  commence  to  look  around  and  ask  questions 
we  have  a  right  to  ask.  Did  he  ever  manage  a  railroad  ?  No,  he 
never  did.  Place  him  in  the  general  manager's  chair  in  charge  of 
one  of  the  great  railroad  systems,  and  he  would  be  lost.  You 
would  have  to  put  a  bell  on  him  to  find  him.  Did  he  ever  design 
a  locomotive,  or  draft  one?  No,  he  never  did.  Did  he  ever 
shovel  any  coal  into  one?  No,  he  never  did.  I  have.  I  have 
shoveled  more  coal  into  locomotives  than  you  could  pile  on  a  city 
block.  Mr.  Brandeis  has  had  no  practical  experience,  and  knows 
nothing  about  the  subject.  Yet  only  yesterday  he  stated  we 
could  save  five  hundred  thousand  dollars  a  day  on  fuel  alone.  No 
railroad  is  at  the  present  time  throwing  away  a  dollar,  and,  re- 
gardless of  Mr.  Brandeis'  statement  to  the  contrary,  the  American 
railroads  are  the  best  managed  of  any  in  the  world.  The  men 
in  charge  of  these  great  systems  stand  head  and  shoulders  above 
the  railroad  men  of  the  world.  There  is  no  other  class  of  busi- 
ness that  is  operated  on  so  close  a  margin,  no  other  business 
where  the  details  are  watched  so  closely  as  on  the  average  rail- 
road. And  yet  Mr.  Brandeis  says  they  can  save  $365,000,000  a 
year.  He  must  have  gotten  that  fairy  tale  out  of  some  story 
book.     *     *     * 

"The  individual  shippers  of  the  country  are  the  very  ones  who 
reap  the  benefits  of  all  rebates  ever  given  and  cause  the  present 
drastic  laws  for  the  regulation  of  interstate  traffic  to  be  enacted." 
Right  there  I  would  like  to  interject  the  remark  that  it  seems 
to  me  there  has  been  a  bewildering  confusion  of  ideas  as  to  ship- 
pers and  the  public.  They  are  two  very  different  interests.  The 
former  continually  masquerades  in  the  raiment  of  the  latter, 
especially  before  the  Interstate  Commerce  Commission,  which 
apparently  has  never  realized  the  deception.  Mr.  Stone  did  when 
he  said : 

"In  the  end,  who  pays  the  freight  ?  The  most  superficial  study 
of  the  question  will  prove  to  any  one  that  the  consumer  pays  the 
freight.  The  shipper  does  not  pay  a  dollar  of  the  freight.  He 
is  simply  a  parasite  who  lives  off  the  consumer  and  the  producer, 
one  of  the  middfemen  who  take  their  toll  and  increase  the  cost  of 
living." 

In  support  of  this  view  I  might  add  that  since  1900  there  has 
been  remitted  in  the  reduction  of  rates  to  the  shippers  over,  or 
nearly,  fourteen  billion  dollars,  not  one  cent  of  which  has  ever 
reached  the  consumer.     You  know  that  it  has  not,  because  you 

[659] 


148  RAILROAD  LEGISLATION  [Vol.  VIII 

know  that  in  the  meantime  everything  that  the  consumer  has  paid 
for  has  gone  up. 

And  then  Mr.  Stone  concluded  his  remarks  with  the  following 
summary  of  the  situation,  more  impressive,  even  now,  than  when 
it  was  spoken : 

"I  believe,"  said  he,  "that  the  masters  of  finance,  such  as  repre- 
sented by  Mr.  Morgan  and  others,  are  absolutely  right  when  they 
say  they  have  reached  the  limit  of  economy  in  railroad  operation. 
I  don't  believe  it  is  possible  to  do  any  more  along  that  line,  and 
I  agree  with  them  that  anything  in  the  future  toward  improve- 
ment will  have  to  be  by  addition  or  increase  to  freight  rates. 
There  never  was  a  time  in  the  history  of  the  railroads  when  so 
much  was  demanded  as  now.  There  never  was  a  time  when  so 
much  was  demanded  along  the  line  of  fast  traffic,  high  speed, 
splendid  roadbeds  and  a  thousand  and  one  other  things,  and  there 
never  was  a  time  when  the  railroads  were  in  need  of  more  money 
to  make  improvements,  build  terminals  and  other  things  needed 
as  now,  and  the  only  hope  for  them  is  in  an  increased  freight 
rate.  What  is  the  result?  Today  in  this  country  everybody  is 
waiting  to  see  what  the  Interstate  Commerce  Commission  is  going 
to  do  in  regard  to  freight  rates ;  business  is  practically  at  a  stand- 
still ;  there  is  a  wave  of  uncertainty  in  the  air ;  you  may  say  it  is 
all  due  to  the  wage  movement.  It  is  true  we  have  had  increase  of 
wages  throughout  the  country ;  but  that  doesn't  begin  to  compen- 
sate for  the  increase  in  the  cost  of  living  during  the  same  time  and 
the  same  period.  The  increased  cost  of  wages  is  not  what  is 
causing  the  increased  cost  of  living  at  the  present  time.  Every 
other  commodity  has  had  to  increase  prices  except  the  railroads ; 
everything  they  had  is  going  up,  not  only  labor,  but  everything 
else,  and  everything  the  railroads  have  to  sell  is  going  down,  and 
unless  there  is  a  change  of  public  opinion  in  the  near  future,  some 
of  the  best  managed  railroads  today  will  have  all  they  can  do  to 
keep  their  heads  above  water,  and  they  haven't  the  money  and 
can't  get  it  for  the  needed  improvements  they  have  to  make." 

Much  water  has  gone  over  the  dam  in  the  eight  years  since 
these  candid  words  were  uttered.  The  Commission  denied  the 
relief  for  which  Mr.  Stone  pleaded,  with  a  few  words  of  manana 
thrown  in  by  Commissioner  Lane.  The  average  ton  mileage  re- 
ceipts continued  to  drop  from  7.57  mills  in  1911  to  7.14  in  1916. 
The  Adamson  law  added  $200,000,000  to  the  cost  of  operation 
and  Mr.  McAdoo's  Order  No.  27  and  its  supplements 
$800,000,000  more,  only  partly  offset  by  belated  increases  in  fares 

[660] 


No.  4]  WHAT  WARREN  S.  STONE  THOUGHT  IN  ign  149 

and  rates.  The  operating  ratio  grew  from  68.66%  in  1911  to 
over  85%  for  the  nine  months  ending  September  30,  1919,  and 
taxes  increased  apace.  The  government  took  over  the  railways 
to  win  the  war,  but,  with  a  shrewdness  unworthy  of  a  great  and 
just  government,  included  the  worst  year  in  the  record  since  1908 
in  the  test  period  by  which  the  standard  return  was  reduced 
fully  $100,000,000. 

The  situation  today  calls  for  an  advance  of  at  least  thirty 
per  cent  in  freight  rates  to  meet  the  increasing  wages  which  the 
Director  General  continues  to  order  while  refusing  to  order  the 
increase  in  rates  which  he  still  has  the  power  to  grant. 

And  yet  I  have  sat  here  and  heard  the  question  of  what  is  the 
matter  with  the  railways  discussed  from  every  angle  but  what 
I  believe  to  be  the  correct  one :  A  mandate  from  Congress  to  the 
Interstate  Commerce  Commission  to  reverse  its  traditional  atti- 
tude toward  the  railways.  The  railway  situation  to-day  is  the 
result  of  the  departure  of  the  Commission  from  the  purpose  of 
its  creation  as  announced  by  Judge  Thomas  M.  Cooley  in  its  first 
report,  when  he  said :  "The  Act  to  Regulate  Commerce  was  not 
passed  to  injure  any  interest  but  to  conserve  and  protect.  It  had 
for  its  object  to  regulate  a  vast  business  according  to  the  require- 
ments of  justice." 

If  the  Commission  would  rise  to  the  full  measure  of  its  vast 
powers  and  responsibilities,  the  railway  problem  would  be  solved 
without  its  asking  for  greater  powers. 


[661] 


RAILWAY  CREDIT  AND  THE  INTERSTATE  COM- 
MERCE COMMISSION 

CHARLES  WHITING  BAKER 
Consulting  Editor  of  Engineering  News-Record 

I  HOLD  no  brief  for  the  Interstate  Commerce  Commission; 
but  as  they  stand  here  charged  with  the  responsibility  for 
the  collapse  of  railway  credit,  some  presentation  should  be 
made  of  their  side  of  the  case. 

As  stated  by  Commissioner  Clark  in  his  testimony  before  the 
Esch  Committee  on  July  15,  1919,  the  facts  are  briefly  as  fol- 
lows :  Prior  to  August  28,  1906,  the  Interstate  Commerce  Com- 
mission had  no  authority  to  fix  railway  rates.  In  the  years  from 
1900  to  1906  the  dividend  payments  to  railway  companies  varied 
from  $140,000,000  in  1900  to  $272,000,000  in  1906.  Since 
1906,  with  the  Commission  in  control  of  rates,  railway  dividends 
have  largely  increased.  They  were  $390,000,000  in  1907  and 
$460,000,000  in  1911.  The  total  payments  to  railway  stock  and 
bond  holders,  which  were  $460,000,000  in  1902,  were  $870,- 
000,000  in  1911  and  $892,000,000  in  1914.  The  percentage  of 
railway  stock  which  pays  dividends  has  increased  under  the 
Commission's  control.  In  the  five  years  prior  to  1905  the  per- 
centage of  outstanding  railway  stock  paying  dividends  varied 
from  46%  in  1900  to  57%  in  1904.  Since  1907  the  percentage 
of  railway  stock  paying  dividends  has  in  no  year  fallen  be- 
low 60%  and  reached  67.65%  in  1911.  Not  only  this,  but  the 
average  rate  of  dividends  has  increased.  In  the  four  years  prior 
to  1904  the  average  dividend  was  less  than  6%.  In  no  year 
since  1906  has  the  average  dividend  rate  been  less  than  6%%, 
and  in  four  of  those  years  the'  rate  was  above  7%  and  in  two 
years  above  8%. 

Thus,  the  railway  security  holders  as  a  whole  have  fared  bet- 
ter in  the  years  since  the  teeth  were  put  into  the  Interstate 
Commerce  law  than  in  the  years  preceding.  This  is  true  notwith- 
standing the  many  million  dollars  which  holders  of  railway  securi- 
ties have  lost  during  these  latter  years  through  the  financial 
misdeeds  in  connection  with  the  railway  systems  of  New  England, 
the  St.  Louis  &  San  Francisco,  the  Pere  Marquette,  the  Cincin- 
nati, Hamilton  &  Dayton,  and  various  other  companies. 

[662] 


No.  4]  RAILWAY  CREDIT  151 

It  needs  only  a  reference  to  these  well  remembered  scandals 
to  make  it  clear  that  there  are  other  reasons  why  investors  hesi- 
tate to  buy  railway  securities  than  fear  of  what  the  Interstate 
Commerce  Commission  may  do. 

And  having  said  this  much  in  defense  of  the  Commission  and 
in  opposition  to  the  campaign  of  publicity  which  attempts  to 
make  it  responsible  for  the  collapse  of  railway  credit,  let  me 
say  with  equal  frankness  that  in  my  opinion  the  time  is  past 
when  Congress  can  merely  toss  over  to  the  Commission  the  re- 
sponsibility for  Government  regulation  of  the  railways.  The 
Commission  is  organized  as  a  judicial  body,  to  enforce  legisla- 
tion. There  must  be  in  the  Government  an  efficient  executive 
organization  to  deal  with  the  railways  if  our  work  of  railway 
regulation  is  not  to  break  down ;  and  it  must  not  break  down,  if 
we  are  to  escape  outright  Government  ownership  and  operation. 


[663] 


THE  HUMAN  FACTOR  IN  THE  RAILROAD  BUSINESS 

HENRY  R.  SEAGER 
Professor  of  Political   Economy,   Columbia  University 

WE  are  going  to  discuss  this  morning  the  really  difficult 
phase  of  the  railroad  problem,  "The  Railroads  and 
Labor." 

The  impression  that  we  all  have  received  from  the  meetings 
held  yesterday  is,  I  believe,  one  of  optimism.  The  situation  of 
the  railroads  is,  to  be  sure,  critical,  but  the  remedy  from  the 
viewpoint  of  the  investor  is  not  difficult  to  discover.  It  is 
obviously  an  adequate  increase  in  railroad  rates.  That  remedy 
would  seem  to  bear  hardly  upon  the  shipper,  but  as  was  brought 
out,  without  prosperity  on  the  part  of  our  railroads  we  cannot 
expect  general  business  prosperity,  and  if  we  have  general  busi- 
ness prosperity  then  the  shipper  can  easily  bear  the  burden  of 
higher  rates.  This  seems  to  ignore  the  fact  that  at  last  analysis 
the  public,  the  consumer,  must  pay  the  bills,  but  as  was  also 
pointed  out,  if  our  remedy  gives  us  railroad  prosperity  and  gen- 
eral business  prosperity  then  the  public  must  share  in  the  good 
times  and  will  not  mind  an  added  burden  in  the  form  of  some- 
what higher  prices — not  necessarily  much  higher  prices — as  the 
result  of  the  higher  railroad  rates. 

Altogether  this  has  given  us  a  somewhat  cheerful  picture  of 
what  easily  lies  before  us  in  connection  with  the  railroad  problem. 
This  morning,  we  take  up  the  aspect  which  presents  elements  of 
friction  and  dissatisfaction  that  are  not  so  readily  disposed  of. 
We  take  up  the  human  factor,  and  as  was  long  ago  pointed  out 
by  Adam  Smith,  there  is  no  .aspect  of  economic  relations  that  is 
so  troublesome  or  where  the  element  of  friction  is  so  great  as 
the  human  aspect. 

At  the  very  outset,  the  phrase  which  describes  the  topic  for 
the  morning,  "The  Railroads  and  Labor,"  may  be  objected  to 
because  it  is  too  impersonal.  By  the  "railroads"  in  this  connection 
I  take  it  we  mean  the  human  beings  who  are  called  upon  to  ad- 
minister the  railroads — the  human  factor  on  the  side  of  manage- 
ment— and  by  labor  we  mean  the  classified  employees  who  operate 
the  railroads  under  the  direction  of  the  management, — the  human 
factor  on  that  side. 

[664] 


No.  4]     THE  HUMAN  FACTOR  IN  THE  RAILROAD  BUSINESS  153 

Before  the  war,  the  relations  between  management  and  labor 
seemed  to  be  fairly  satisfactory.  The  demands  that  were  put 
forward  by  the  organized  workers  were  the  demands  that  we 
should  expect :  demands  for  higher  wages,  shorter  hours,  more 
satisfactory  working  conditions.  There  was  no  fundamental  dif- 
ference of  view  between  the  management  and  the  employees  as  to 
what  was  called  for  by  the  best  interests  of  both.  The  difference 
of  view  was  a -difference  of  degree  as  to  how  high  wages  could 
fairly  be  paid,  how  short  the  hours  could  fairly  be  made,  how 
favorable  the  working  conditions  could  be  made. 

The  new  spirit  engendered  by  the  war  and  experience  of 
government  operation  have  caused  a  radical  change  in  the  de- 
mands of  the  organized  workers.  As  has  been  brought  out  re- 
peatedly at  these  meetings,  the  demands  now  put  forward  with  as 
great  insistence  as  wage  demands  were  ever  put  forward  in  the 
past,  are  for  government  ownership  of  the  railroads,  and  for  the 
participation  of  employees  in  the  management  of  the  railroads. 

Whether  we  consider  these  demands  wise  or  foolish,  we  should 
be  exceedingly  unwise  not  to  recognize  the  necessity  of  adopting 
a  policy  that  pays  due  regard  to  them  in  connection  with  the 
reorganization  of  the  railroad  industry.  For  there  is  nothing 
more  certain  than  that  the  successful  operation  of  the  railroads 
in  the  future  will  continue  to  depend,  as  it  has  in  the  past,  on  the 
loyal  and  efficient  cooperation  of  the  employees. 

It  may  be  possible  for  Congress  to  pass  legislation  which  the 
employees  distrust  and  oppose,  and  it  may  be  possible  to  make 
that  legislation  effective,  but  the  outcome  will  not  be  a  solution 
of  the  railroad-labor  problem.  Such  a  solution  will  be  incom- 
plete and  no  permanent  solution  will  be  achieved  until  some  plan 
that  inspires  the  confidence  and  appeals  to  the  loyalty  of  the 
employees  is  worked  out. 

There  are  two  aspects  of  the  matter  that  I  think  impress  all  of 
us  strongly,  looking  at  the  problem  from  the  viewpoint  of  the 
public :  One  is  the  background  of  this  demand  for  representation 
of  employees  in  management.  Does  it  represent  a  desire  on  the 
part  of  the  railroad  employees  to  arrogate  to  themselves  the 
management  of  this  industry?  I  do  not  believe  that  this  can 
fairly  be  said.  Does  it  not  rather  represent,  as  Mr.  Shea  brought 
out  last  night,  distrust  of  the  management  based  partly  on  reve- 
lations of  flagrant  manipulation  of  railroad  securities,  in  some 
instances  in  the  past,  and  partly  on  ignorance  ?    I  want  to  throw 

[66S] 


154  RAILROAD  LEGISLATION  [Vol.  VIII 

out  the  thought  that  even  though  representation  of  employees  on 
railroad  boards  may  not  contribute  greatly  to  the  efficiency  of  the 
railroads  directly,  if  indirectly  it  can  serve  to  give  to  the  rank 
and  file  confidence  in  the  management,  and  information  in  regard 
to  vital  aspects  of  the  problem  that  confronts  the  management, 
it  may  be  of  tremendous  benefit  in  increasing  the  efficiency  of 
railway  operation. 

The  other  aspect  is  that  connected  with  continuous  operation 
of  the  railroads.  Enthusiasm  was  excited  several  times  during 
the  meetings  yesterday  by  references  to  the  anti-strike  provision 
of  the  Cummins  Bill.  The  premise  on  which  this  provision  rests, 
that  is,  that  we  must  have  uninterrupted  operation  of  our  rail- 
roads, we  all  undoubtedly  subscribe  to.  The  time  is  past  when 
we  can  tolerate  any  interference  with  the  continuous  operation 
of  our  railroads,  but  whether  the  conclusion  which  Senator  Cum- 
mins and  his  associates  draw,  that  is,  that  this  means  anti-strike 
legislation,  making  strikes  conspiracies  and  trying  to  penalize 
them  through  the  courts,  is  another  matter. 

In  these  questions  involving  the  human  factor,  the  logic  of 
the  matter  is  not  always  convincing  to  those  who  understand  the 
psychology  of  the  situation.  We  have  an  illustration  in  connec- 
tion with  the  coal  strike.  So  far  as  the  law  is  concerned  it  is 
substantially  the  same  as  would  be  the  law  under  the  Cummins 
Bill,  but  is  it  causing  coal  to  be  mined?  Even  so  conservative  a 
paper  as  the  Times  pointed  out  the  other  day  that  you  cannot, 
through  writs  of  injunction,  compel  men  to  mine  coal  when  they 
do  not  wish  to.  Is  not  the  contention  of  Mr.  Shea  last  night, 
that  if  we  deprive  these  railroad  employees  of  the  right  to  strike 
that  is  enjoyed  by  other  employees,  the  necessary  corollary  of  the 
policy  is  that  we  put  them  in  a  preferred  position  as  employees ; 
that  is,  that  we  work  out  for  their  protection  what  Mr.  Shea 
called  an  industrial  code,  including,  as  he  views  it,  a  living  wage, 
the  eight-hour  day,  the  guarantee  of  regular  employment  during 
good  behavior,  and  so  on.  Must  we  not  think  of  these  two  things 
together?  If  we  take  away  something,  must  we  not  reconcile 
railroad  employees  to  the  change  by  giving  them  something— giv- 
ing them  something  that  insures  that  they  shall  enjoy  the  favor- 
able conditions  of  employment,  that  in  their  view  they  can  only 
be  sure  of  under  present  conditions  by  retaining  the  right  to 
strike  ? 

The  bright  spot  in  our  railroad  situation  is,  to  my  mind,  the 

[666] 


No.  4]     THE  HUMAN  FACTOR  IN  THE  RAILROAD  BUSINESS  155 

character  of  our  railroad  employees — the  character  of  the  men 
in  the  brotherhoods,  and  the  character  of  the  men  who  are  man- 
aging our  railroads. 

To  a  very  large  extent,  our  practical  railroad  managers  are 
men  who  have  come  up  through  every  stage  of  the  industry,  who 
understand  the  psychology  of  the  wage  earner,  because  they  them- 
selves have  been  wage  earners,  and  who  also  understand  the 
problems  of  management  because  they  are  managers,  and  who 
also  through  their  constant  contact  with  boards  of  directors, 
understand  the  financial  side  of  railroad  operation. 


► 


[667? 


PENDING  RAILWAY  LEGISLATION 

TIMOTHY    SHEA 
Acting  President  Brotherhood   of   Locomotive  Firemen  and  Enginemen 

I  AM  very,  glad,  indeed,  to  be  present  on  this  occasion  and 
make  a  few  observations  concerning  pending  railroad  legis- 
lation now  before  Congress,  known  as  the  Cummins  and 

Esch  bills. 

At  the  outset  I  desire  to  say  that  there  are  always  two  sides  to 
every  question,  and  in  this  connection  I  am  frank  to  admit  that 
capital  has  rights  that  must  be  recognized.  On  the  other  hand, 
I  am  sure  you  will  agree  with  me  that  labor  has  rights  that  must 
not  only  be  recognized  but  respected. 

Capital  cannot  get  along  without  labor,  and,  conversely,  labor 
cannot  very  well  get  along  without  capital  because  out  of  labor 
capital  and  all  of  the  wealth  of  the  country  is  produced. 

The  railway  labor  organizations  are  opposed  to  the  funda- 
mental basis  of  both  the  so-called  Cummins  and  Esch 
bills.  They  are  unalterably  committed  to  the  principle  of 
public  ownership  and  a  certain  form  of  public  operation.  As  a 
consequence,  we  do  not  favor  any  pending  railway  legislation, 
however  modified  its  form  may  be,  which  has  for  its  object  a 
return  to  the  old  conditions  of  private  ownership  and  operation 
of  the  transportation  industry.  I  wish  to  emphasize  this  point 
of  view  at  the  outset,  so  that  in  discussing  special  features  of  the 
Senate  and  House  bills  which  are  peculiarly  objectionable  to  us, 
I  may  not  possibly  be  misunderstood  as  giving  my  assent  to  other 
parts  of  these  proposals,  or  of  being  in  accord  with  the  general 
theory  of  ownership  and  operation  upon  which  they  are  con- 
structed. 

Anti-Strike  Provisions 

With  this  reservation  in  mind  and  considering  the  bills  as  they 
stand,  the  most  objectionable  provisions  so  far  as  employes  are 
concerned  are  those  in  the  Cummins  bill  dealing  with  labor  con- 
ditions and  relations.  The  authors  of  the  Cummins  bill  directly 
state  that  they  are  determined  to  shackle  labor  by  taking  away 
from  it  the  right  to  strike.  The  framers  of  the  Esch  bill  at  first 
had  the  same  object  in  view.  The  labor  provisions  which  they 
originally  proposed  were  even  more  vicious  than  those  of  the 

[668] 


No.  4]  PENDING  RAILWAY  LEGISLATION  157 

Senate  bill,  because  they  were  indirect  and  subtle.  Their  effect 
would  have  been  to  disrupt  labor  organizations,  dissipate  their 
resources,  absorb  their  protective  funds  and  render  their  leader- 
ship powerless  by  making  non-compliance  with  a  wage  award 
or  rinding  a  legal  g. "umd  for  damages.  When  this  was  pointed 
out  to  the  House,  these  labor  provisions,  I  am  glad  to  say,  were 
stricken  out  of  the  Esch  bill.  The  object  which  it  is  hoped  to 
attain  by  the  Cummins  bill,  however,  is  identical — the  deprivation 
of  labor  of  its  most  effective  weapon, — the  right  to  strike. 

A  Deliberate  Conspiracy 

The  anti-strike  provisions  of  the  Cummins  bill  are  justified  out- 
wardly by  the  claim  that  the  public  welfare  must  be  protected 
against  dislocations  and  stoppage  of  transportation  facilities. 
The  distinguished  Chairman  of  the  Senate  Committee,  whose 
name  the  Senate  bill  bears,  and  many  others  in  the  Senate,  are 
undoubtedly  sincere  in  this  point  of  view.  But  they  are  blinded 
by  sinister  interests  which  lurk  invisibly  in  the  background.  We, 
who  represent  labor,  may  be  unduly  suspicious  at  times,  but  we 
pride  ourselves  in  the  fact  that  we  have  long  since  become  pro- 
ficient in  detecting  the  hand  of  Esau  when  we  hear  a  voice  which 
seems  to  be  the  voice  of  Jacob.  And  we  have  found  it  wise  not 
to  forget  another  Biblical  story.  You  will  recall  that  the  prophet 
Samuel  tells  that  when  Joab  met  Amasa,  he  said,  "Art  thou  in 
health,  my  brother?"  and,  as  was  the  custom  of  friendly  greeting 
in  those  early  days,  he  took  Amasa  by  the  beard  with  the  right 
hand  to  kiss  him.  But  in  an  excess  of  confidence  "Amasa  took  no 
heed  to  the  sword  that  was  in  Joab's  hand ;  so  he  smote  him 
therewith  in  the  fifth  rib"  and  Amasa  died. 

We  have  not  the  confidence  of  Amasa  and  when  we  look  be- 
yond these  anti-strike  proposals  we  can  see  the  sword  of  treach- 
ery. The  chief  executives  of  the  railway  labor  organizations 
have  become  convinced — and  their  conclusions  are  based  on 
actual  evidence — that  the  pending  anti-strike  legislation  is  the 
indirect  outcome  of  a  conspiracy  to  reduce  the  wages  of  railroad 
employees  below  their  present  inadequate  levels.  The  dominating 
financial  interests  in  the  transportation  industry,  who,  in  the 
background,  conspired  to  bring  about  this  legislation  under  the 
dissimulation  of  protecting  the  public  against  railway  strikes, 
have  decided  that  when  government  control  of  the  transportation 
industry  is  terminated,  they  will  reduce  the  rates  of  pay  of  railway 

[669] 


1S8  RAILROAD  LEGISLATION  [Vol.  VIII 

workers  and,  if  strikes  result,  they  will  break  them  by  fining  or 
imprisoning  the  strikers  and  their  leaders.  It  is  the  same  reason- 
ing and  it  is  the  same  group  who  have  attempted  to  continue  the 
enslavement  of  the  iron  and  steel  workers  by  denying  them  the 
right  of  collective  bargaining.  These  interests  are  also  respon- 
sible for  the  failure  of  the  National  Industrial  Conference  called 
by  President  Wilson  to  function.  They  are  also  the  fundamental 
forces  against  bituminous  mine  workers  and  are  at  the  bottom 
of  the  conspiracy  to  exploit  both  the  miners  and  the  consumers 
of  coal.  Their  object  is  never  altruistic  but  always  sinister. 
Their  purpose  is  to  continue  unchecked  their  war-time  profiteer- 
ing, and  the  exploitation  of  wage-earners  and  the  public,  in 
which  profitable  policy  they  had  been  so  successful  prior  to  the 
war.  It  is  unnecessary  to  say  that  not  only  as  railway  workers, 
but  as  free  and  patriotic  citizens  in  our  self-governing  Ameri- 
can republic,  we  shall  resist  this  conspiracy  to  the  uttermost. 
Under  no  conditions  shall  we  consent  to  be  shackled  with  legal 
chains  of  industrial  slavery. 

Anti-Strike  Legislation  Means  Involuntary  Servitude 
There  is  no  blinking  of  the  fact  that  the  real  interest  and 
the  vital  significance  of  anti-strike  legislation  to  the  railroad  em- 
ploye is  involuntary  servitude.  It  will  render  him  powerless  in 
the  presence  of  his  most  formidable  and  ruthless  adversaries. 
Not  only  would  his  power  of  defense  be  lost,  but  what  is  of  al- 
most equal  importance,  he  would  be  without  strength  for  an  of- 
fensive of  any  description  or  for  the  advocacy  of  a  constructive 
program  of  any  merit.  It  is  strange  and  incredible,  that  when  we 
have  just  made  every  sacrifice  of  life  and  property  to  destroy 
political  autocracy  in  Europe,  and  when  we  have  been  encouraged 
to  look  forward  to  a  larger  measure  of  industrial  democracy, 
that  a  policy  is  formulated  and  advocated  which  can  mean  noth- 
ing else  than  placing  railroad  workers  under  the  control  of  auto- 
cratic financial  and  industrial  interests. 

Theoretically  Unsound  and  Unjust 

The  anti-strike  provisions  of  the  Senate  bill  now  before  the 
Congress  are  also  theoretically  unsound  and  manifestly  inequit- 
able. The  Chairman  of  the  Senate  Committee  in  his  report  ac- 
companying his  bill  tells  the  railroad  employes  that  he  has  pro- 
vided a  series  of  boards  or  wage-courts  to  pass  upon  their  com- 

[670] 


No.  4]  PENDING  RAILWAY  LEGISLATION  159 

plaints  and,  as  in  civil  and  political  life,  their  differences  are 
justly  decided  by  the  courts,  so  in  the  transportation  world, 
their  complaints  will  be  justly  passed  upon  by  the  machinery 
which  he  has  proposed.  Such  a  statement  is  manifestly  unsound 
however,  for  the  reason  that  the  industrial  constitutionalism  and 
judicialism  which  he  proposes  to  establish  cannot  be  compared 
with  our  fundamental  political  laws  or  the  courts  which  have 
been  established  for  their  interpretation  and  application. 

The  Constitution  of  the  United  States  and  all  democratic  con- 
stitutions contain  a  code  or  bill  of  rights  guaranteeing  personal 
and  civil  liberty  to  the  individual.  The  courts  in  their  decisions 
act  under  the  guidance  or  limitations  of  these  fundamental  guar- 
antees. To  the  individual  they  are  a  condition  precedent  to  the 
acceptance  of  the  constitution  itself  and  to  his  subordination  to 
the  judicial  agencies  under  the  constitution.  Moreover,  all  politi- 
cal constitutions  provide  reasonably  prompt  means  for  their 
own  amendment  or  revision. 

But  the  pending  Senate  bill  provides  no  means  beyond  influenc- 
ing Congress  for  a  change  in  its  labor  provisions.  Neither  does 
it  contain  any  bill  of  rights  or  fundamental  guarantees  or  safe- 
guards to  labor.  If  the  right  of  strike  or  revolt  against  industrial 
conditions  is  to  be  denied,  every  consideration  of  justice  requires 
that  such  legislation  should  be  accompanied  by  an  industrial  code 
or  bill  of  industrial  rights  to  labor,  such  as  the  right  to  a  living 
wage,  the  right  to  a  reasonable  workday,  the  right  to  organize 
and  to  deal  collectively  by  representatives  of  their  own  selection, 
the  denial  that  labor  should  be  treated  as  a  commodity,  and  simi- 
lar principles  which  were  adopted  by  our  own  government  as  a 
war  policy  towards  labor,  or  which  have  been  sanctioned  by  the 
enlightened  opinion  of  the  civilized  world  in  the  so-called  labor 
provisions  of  the  peace  treaty.  Under  such  a  code,  wage  adjust- 
ment boards,  or  industrial  courts,  so  to  speak,  would  be  given  a 
code  of  the  fundamental  rights  of  labor  as  a  basis  for  their  proce- 
dure and  decisions.  There  would  be  a  reasonable  guarantee 
that  the  grievances  of  employees  would  be  justly  settled.  Pro- 
tection of  the  public  against  strikes  would  be  unnecessary,  for 
they  would  never  occur.  The  enactment  of  the  anti-strike  legis- 
lation now  before  the  Senate,  however,  without  the  assurance 
of  any  fundamenal  rights  of  labor,  would  be  equivalent  to  the 
imposition  by  force  upon  an  unwilling  people  of  a  political  con- 
stitution which  did  not  contain  any  guarantees  as  to  the  rights 

[671] 


160 


RAILROAD  LEGISLATION  [Vol.  VIII 


of  freedom  of  speech,  of  worship,  or  of  assembly,  and  an- 
nouncing to  the  individual  citizens  that  they  should  submit  all 
their  injustices  to  a  series  of  boards  or  courts  under  that  con- 
stitution and  thus  secure  a  just  settlement  of  all  of  their  com- 
plaints. The  enactment  of  anti-strike  legislation  for  the  railroad 
employees  would,  in  other  words,  be  identically  the  same  as  the 
forcing  upon  a  part  of  the  people  by  all  of  the  people  restrictions 
for  their  government  without  any  measures  for  their  protection. 
We  submit  that  such  legislation  is  not  only  unjust  and  intol- 
erable, but  is  opposed  to  the  fundamental  ideals  of  American 
democracy.  If  labor  is  to  be  deprived  of  the  right  to  strike  and 
is  to  be  required  to  submit  all  its  grievances  to  judicial  determina- 
tion, such  a  policy  must  obviously  be  preceded  by  legislation  or 
agreement  which  will  give  to  labor  in  the  form  of  industrial 
principles  or  fundamental  law  the  assurances  of  its  fundamental 
economic  rights.  Without  such  a  policy,  anti-strike  legislation 
will  open  wide  the  door  to  an  intolerable  exploitation  of  the  work- 
ing classes  which  will  result  in  violent  protest  and  the  break- 
down of  civil  government. 

It  is  for  this  reason  that  the  third  practical  consideration 
against  such  legislation  may  be  stated.  It  is  not  feasible.  Being 
unjust  and  undemocratic,  free  men  will  not  endure  it.  It  is, 
therefore,  impracticable.  All  of  the  industrial  and  commercial 
nations  of  the  world  have  in  past  years  tried  such  a  policy  in 
some  form,  and  with  the  exception  of  France  and  Russia  under 
the  old  regime,  they  all  found  that  it  did  not  work.  In  Russia, 
discontented  public  service  employees  were  executed,  and  in 
France,  because  of  its  laws  for  universal  military  service,  strik- 
ers were  called  to  the  colors  and  defeated  by  military  coercion. 
Hundreds  of  thousands  of  men  cannot  in  the  event  of  a  discon- 
tinuance of  work  be  placed  in  jail.  Men  will  not  submit  to  the 
confiscation  of  their  financial  resources  and  property  because 
they  have  refused  to  accede  to  unjust  working  or  living  condi- 
tions. 

These  facts  must  surely  have  been  known  to  the  Senate  com- 
mittee which  recommended  the  Cummins  bill.  If  not,  they  should 
have  known.  Three  years  ago,  an  exhaustive  report  was  pre- 
pared under  the  auspices  of  this  committee,  which  showed  that 
anti-strike  legislation  wherever  tried  had  been  found  to  be  im- 
practicable and  ineffective. 

Finally,  it  may  be  said  that  the  proposal  of  such  legislation 

[672] 


No.  4]  PENDING  RAILWAY  LEGISLATION  161 

at  this  time  is  all  the  more  unpardonable  because  it  is  unneces- 
sary. There  has  been  no  strike  of  any  consequence  among 
transportation  employees  for  more  than  thirty  years.  There  has 
been  no  recent  threat  of  any  serious  stoppage  of  work.  As  a  con- 
sequence, an  attempt  to  justify  such  proposals  by  the  claim  that 
the  public  interest  must  be  protected  against  strikes  falls  of  its 
own  weight,  and  leads  irresistibly  to  the  conclusion  that  some  other 
motive,  not  so  laudable  as  the  protection  of  the  public,  is  back 
of  this  legislation.  To  those  who  know  conditions  and  have  an 
insight  into  the  psychology  of  the  railroad  worker,  it  is  apparent 
that  the  enactment  of  such  legislation  will  have  exactly  the  op- 
posite effect  to  that  for  which  it  is  intended.  It  will  add  to  ex- 
isting discontent,  stimulate  dislocation  of  transportation  facilities, 
and  probably  lead  to  a  stoppage  of  work  on  a  scale  that  has  been 
hitherto  deemed  incredible. 

Fundamental  Considerations  Involved 

The  fundamental  considerations  which  are  involved  in  a  per- 
manent railroad  policy  and  for  the  correct  working  out  of  which 
time  and  study  are  necessary  are  fourfold  in  number.  In  the  first 
place,  justice  must  be  done  to  those  who  represent  capital  in- 
vested in  the  transportation  industry.  These  rights  are  com- 
paratively easy  of  ascertainment  and  satisfaction.  The  govern- 
ment can,  by  judicial  process,  determine  the  amount  of  capital 
which  has  been  prudently  and  honestly  invested  in  the  rail- 
roads and  acquire  the  ownership  of  the  properties  by  justly  re- 
imbursing those  who  represent  capital.  There  should  be  no  con- 
fiscation of  investment  values,  or  rigid  adherence  to  any  theory 
of  valuation  which,  while  logically  correct,  would  result  in  loss 
and  injustice.  Acquisition  of  and  reimbursement  for  railroad 
properties  should  proceed  after  a  judicial  consideration  of  all  the 
facts  and  interests  involved  and  should  follow  the  lines  of  an 
equitable  adjustment  of  the  claims  of  all  parties  concerned. 

The  labor  organizations,  in  putting  forth  the  so-called  Plumb 
plan,  have  been  accused  of  attempting  to  confiscate  the  property 
of  innocent  persons  without  due  process  of  law  by  failing  to  dis- 
tinguish between  those  who  have  been  responsible  for  improper 
methods  of  railroad  finance  and  the  holders  of  securities  which 
have  been  improperly  issued  as  a  result  of  these  methods.  Noth- 
ing can  be  farther  from  the  truth.  We  have  no  desire  to  injure 
the  holdings  of  the  much-famed  "widows  and  orphans"  or  to  re- 

[673] 


162  RAILROAD  LEGISLATION  [Vol.  VIII 

duce  the  reserve  of  savings  banks  and  other  institutions.  This 
charge  against  us  is  especially  absurd  since  our  own  people  are 
large  depositors  in  savings  banks  and  similar  institutions,  who 
unfortunately  may  have  been  victimized  in  the  past  by  the  ven- 
dors of  railroad  stocks  and  bonds.  We  wish  to  see  justice 
done  for  the  public  and  to  all  parties  concerned.  We  know  of  no 
better  method  to  attain  this  end  than  by  judicial  consideration 
and  determination  of  values  of  railroad  property  and  securities 
upon  the  basis  of  the  equities  and  the  facts. 

In  the  second  place,  another  essential  condition  to  government 
acquisition  and  operation  of  the  transportation  industry  should 
be  the  guarantee  to  railway  labor  of  its  fundamental  rights. 
The  legislation  enacted  should  contain  an  industrial  code,  so  to 
speak,  which  would  embody  the  fundamental  guarantees  to  labor 
upon  which  future  adjustments  of  wages  and  working  conditions 
should  be  based.  These  principles  were  sanctioned  by  our  gov- 
ernment during  the  war  and  were  embodied  in  the  so-called 
principles  of  the  National  War  Labor  Board.  They  are  also 
contained  in  the  peace  treaty  in  the  labor  provisions  of  the 
Covenant  of  the  League  of  Nations.  Among  the  most  impor- 
tant of  these  is  the  right  of  workers  to  organize  and  deal  col- 
lectively through  their  own  chosen  representatives,  an  eight-hour 
workday,  and  the  right  to  a  living  wage.  By  way  of  illustration, 
as  a  preliminary  to  a  permanent  railway  policy,  there  should  be, 
after  a  complete  investigation,  a  determination  of  a  living  wage 
for  all  occupational  groups  which  would  afford  not  only  subsis- 
tence but  a  reasonable  standard  of  health  and  comfort  to  the  fam- 
ilies of  railway  workers.  Upon  the  basis  of  these  minimum 
standards  of  a  living  wage,  differentials  should  then  be  fixed 
varying  according  to  the  productive  worth  of  employees  to  the 
industry,  corresponding  to  their  training,  skill  and  experience. 
With  the  acceptance  and  practical  application  of  these  and  other 
fundamental  rights  of  labor' in  the  fundamental  law,  railroad 
employees  would  be  satisfied,  future  adjustments  between  labor 
and  management  would  be  comparatively  easy,  and  there  would 
be  no  danger  of  strikes  or  dislocations. 

In  the  third  place,  the  policy  should  be  accepted  at  the  outset 
and  should  be  given  a  practical  application,  under  which  employees 
and  managers  should  participate  in  increases  in  railway  earnings 
in  the  form  of  increased  wages  or  salary  payments,  and  the  pub- 
lic should  be  guaranteed  a  similar  participation  in  the  shape  of 

[674] 


No.  4]  PENDING  RAILWAY  LEGISLATION  163 

lower  transportation  charges  or  more  improved  and  safer  trans- 
portation facilities.  Such  a  policy  would  make  for  economy 
and  efficiency  of  railway  operation  and  would  bring  all  interests 
concerned  into  enthusiastic  cooperation  in  making  public  opera- 
tion a  success. 

Finally,  the  constraining  motive  at  all  times  should  be  public 
service  and  the  public  good.  The  interest  of  the  public  is  ob- 
viously paramount.  With  the  recognition  and  observance  of  the 
fundamental  rights  of  or  safeguards  to  labor  in  the  way  in 
which  I  have  indicated,  there  would  be  no  clash  between  railway 
employees  and  the  government.  The  transportation  workers 
would  cordially  and  single-heartedly  unite  in  operating  the  rail- 
roads in  the  interest  of  all  the  people.  As  a  matter  of  fact,  the 
interests  of  the  public  and  of  railroad  workers  would  be  so 
similar  as  to  be  indissoluble. 

The  Ideals  of  the  Employees 

These  are  the  ideals  and  aims  of  railway  employees.  The  at- 
tempt has  been  made  to  apply  them  concretely  in  the  bill  which 
we  have  submitted  to  the  Congress  and  which  is  popularly  known 
as  the  Plumb  Plan.  We  do  not  claim  that  this  bill  is  perfect. 
Some  modifications  of  it  will  undoubtedly  be  necessary.  We  do 
believe,  however,  that  the  fundamental  principles  underlying  it 
are  absolutely  sound.  In  this  connection,  I  might  say  that  our 
opponents  have  attempted  to  cast  a  stigma  upon  our  proposals 
by  asserting  that  we  are  endeavoring  to  Russianize  the  railroads 
by  substituting  for  the  present  domination  of  capital  an  autocracy 
of  labor — that  we  are  endeavoring  to  secure  the  control  of  the 
transportation  industry  by  labor  and  its  operation  by  labor  in  the 
selfish  interests  of  labor.  It  scarcely  seems  necessary  to  reply  to 
such  obvious  misrepresentation.  What  we  are  trying  to  do  is  to 
place  the  railroads  under  democratic  control,  and  with  the  funda- 
mental rights  of  employees  guaranteed  and  their  future  hopes 
safeguarded,  to  have  the  industry  serve  all  the  people,  and  not 
any  one  class.  It  is  our  purpose  to  see  the  present  domination 
and  exploitation  of  the  industry  by  capital  supplanted  by  a  demo- 
cratic control  and  administration. 

Since  our  own  Declaration  of  Independence  and  the  French 
Revolution,  the  principles  of  political  democracy  have  been 
growing  and  spreading  over  the  face  of  the  earth  until  they 
have  now  practically  been  accepted  by  all  civilized  peoples.    The 

[675] 


164  RAILROAD  LEGISLATION  [Vol.  VIII 

experience  of  recent  years  with  political  democracy  has  taught 
us  that  it  will  be  a  failure  unless  it  is  supplemented  by  rational 
measures  of  industrial  democracy.  Industry  must  cease  to  domi- 
nate our  democratic  institutions.  Industry  must  be  subordinated 
to  our  democratic  institutions  and  ideals.  The  members  of  the 
railway  labor  organizations  are  peculiarly  American.  They 
are  principally  born  of  native  fathers  whose  fathers  and  grand- 
fathers were  in'  turn  of  native  birth.  They  cannot  be  accused 
of  being  corrupted  by  foreign  doctrines  which  are  revolutionary, 
fallacious  and  unsound.  They  are  Americans  from  the  beginning. 
They  are  Americans  now.  Their  present  purpose  is  not  to  "Rus- 
sianize" but  to  "Americanize"  the  railroads.  We  wish  their 
management  and  operation  to  be  brought  into  conformity  with 
the  democratic  aspirations  and  ideals  of  the  founders  of  our  self- 
governing  republic.  It  is  because  we  desire  this  and  are  work- 
ing for  it  that  we  urge  the  extension  of  the  present  government 
control  of  railroads  for  a  period  of  two  years  so  that  time  may 
be  given  the  people  to  study  the  problem  and  pass  upon  it  in- 
telligently. 

To  hurry  the  railroads  now  back  to  private  ownership  and  op- 
eration by  means  of  the  Cummins  Bill,  the  Esch  Bill,  or  any 
other  legislation,  would,  in  our  estimation,  be  a  public  calamity. 


[676] 


RELATIONS  OF  RAILROADS  AND  THEIR  EMPLOYEES 

W.  G.  BESLER 

President  Central  Railroad  of  New  Jersey 

MANY  years  ago  when  I  was  in  college  in  Boston,  I 
boarded  with  an  old  gentleman  who  had  made  and  lost 
three  fortunes  in  railroad  contracting.  He  was  a 
fine  specimen  of  the  olden  time  gentleman,  and  had  a  world  of 
wisdom  and  common  sense  stored  up  in  his  head. 

By  reason  of  being  a  member  of  the  family,  so  to  speak,  I 
heard  about  some  family  difficulty  which  was  taking  place  be- 
tween the  brother-in-law  and  his  wife,  also  an  old  couple,  and 
which  resulted  in  a  suit  for  divorce  by  the  wife  on  account  of  al- 
leged incompatibility  of  temperament  and  cruelty. 

The  old  gentleman  with  whom  I  boarded  was  expected  to  be 
the  star  witness  and  furnish  the  necessary  conclusive  testimony, 
but  on  the  day  of  the  trial  (so  I  afterward  learned),  his  evidence 
was  to  the  effect  that  he  saw  no  reason  for  any  divorce,  and  that 
in  his  opinion  the  couple  were  getting  along  about  as  well  as  mar- 
ried people  usually  do ! 

If  I  were  to  be  summoned  as  the  star  witness  in  an  allegation 
for  the  granting  of  a  divorce  of  the  railroad  employees  and  em- 
ployers, I  would  have  to  testify  that,  after  an  experience  of  39 
years  in  close  and  intimate  personal  touch  with  each  and  every 
branch  of  railroad  service,  I  am  of  the  opinion  that,  funda- 
mentally, there  are  no  real  differences  of  any  consequence  be- 
tween the  railroads  and  their  employees ;  that  as  a  rule  they  have 
gotten  along  together,  are  living  together  very  much  more  com- 
fortably and  happily  than  most  other  classes  of  employment; 
and  that  there  is  no  occasion  for  meddling  by  Boards  or  Commis- 
sions or  other  outside  agencies,  as  all  difficulties  in  the  family  can 
be  practically  adjusted  among  themselves  if  given  a  fair  chance 
to  get  together. 

In  the  17  years  that  I  have  had  active  charge  of  the  manage- 
ment of  the  company  with  which  I  am  connected,  there  has  never 
been  a  grand  officer  of  any  of  the  four  brotherhoods  in  my  office 
on  account  of  difficulties  or  troubles  with  their  organizations; 
and  it  was  not  until  the  government  took  over  the  control  and  op- 

[677] 


166 


RAILROAD  LEGISLATION  [Vol.  VIII 


eration  of  the  railroads,  that  an  officer  of  one  of  the  newly  formed 
unions  which  has  sprung  up  since  that  time,  found  it  necessary 
to  ask  for  an  audience,  and  even  his  difficulty  was  subsequently 
adjusted  satisfactorily  through  mediation  and  arbitration. 

Of  course,  it  takes  the  exception  to  prove  the  rule ;  and  there 
have  been  railroads  which  seem  to  have  had  more  than  their 
share  of  trouble  with  their  employees,  but  we  all  know  there  is 
an  underlying  cause  or  reason  for  every  effect ;  and,  in  my  opin- 
ion, if  the  necessary  degree  of  intimacy  had  existed  between  the 
management  and  the  employees,  it  is  more  than  probable  that 
the  difficulty  would  have  been  avoided—the  best  evidence  of 
which  is  that,  subsequently,  they  did  come  together,  but  only 
perhaps  after  hard  feeling  had  been  engendered,  which  might 
have  been  avoided. 

I  wish  to  emphatically  assert  that,  in  my  opinion,  railroad  em- 
ployees have,  since  the  inception  of  railroading,  and  up  at  least 
until  the  recent  past  (if  I  should  even  make  that  exception), 
been,  as  a  rule,  most  loyal  in  their  sentiment  and  pride  in  behalf 
of  their  particular  companies;  and  that  such  a  company  spirit 
has  been  much  more  characteristic  in  the  case  of  railroad  em- 
ployees, than  in  almost  any  other  class  of  employment. 

There  are  reasons  for  this,  one  of  which  is  that  the  character 
of  the  service,  particularly  in  the  operation  of  railways,  requires 
a  greater  degree  of  initiative  than  is  ordinarily  permitted  in  other 
kinds  of  service,  as,  for  example,  in  large  mills  or  factories 
where  the  individual  becomes  but  a  cog  in  the  wheel,  and  seldom 
sees  or  comes  in  contact  with  the  outside  world  of  business. 

Railroad  employees  have  always  been  what  may  be  termed 
a  preferred  class  in  labor  circles.  Their  rates  of  wages,  at  least 
prior  to  the  war,  were  usually  in  advance  of  that  paid  to  other 
classes  of  labor  from  which  they  were  recruited — the  best  evi- 
dence of  which  is  that  they  left  such  employment,  or  decided 
for  themselves  not  to  enter  such  other  places  in  preference  to 
entering  railroad  service. 

Under  the  old  order  of  things,  the  men,  through  their  repre- 
sentatives in  the  brotherhoods,  made  their  occasional  requests 
for  adjustments  in  wages,  which  were  taken  up,  considered  upon 
their  merits,  and  after  conferences  and  mutual  concessions,  a 
new  schedule  was  adopted.  The  men  know  in  advance  about 
how  much  they  were  entitled  to  receive,  and  the  companies 
granted  according  to  their  ability  to  pay,  or  declined  to  allow  be- 

[678] 


No.  4]    RELATIONS  OF  RAILROADS  AND  THEIR  EMPLOYEES         167 

cause  of  reasons  which  were  discussed  to  a  finish  and  settled 
then  and  there.  It  was  not  until  a  nation-wide  movement  for 
standardization  of  wages  was  inaugurated,  that  the  question  of 
railroad  labor  and  railroad  conditions  of  employment  and  wages, 
attracted  much  more  than  local  attention,  and  as  to  this  I  shall 
have  more  to  say  later  on. 

Perhaps  right  here  may  be  as  good  a  place  as  any  for  me 
to  remark  upon  the  statement  so  frequently  made  that  railroad 
employees  were  profiteering;  and  let  us  stop  a  moment  to  con- 
sider just  what  this  means,  and  what  has  taken  place.  There  are 
always  two  sides  to  every  story,  and  on  the  one  side  I  will  give 
a  few  illustrations  of  which  I  have  a  personal  knowledge. 

A  large  department  store  in  the  City  of  New  York  has  under 
contract  a  furrier  who  makes  its  fur  goods.  A  few  years  ago 
this  furrier  received  $85.00  for  a  certain  style  of  lady's  coat. 
For  the  same  coat  he  now  receives  $135.00;  and  curious  to  know 
what  the  article  might  retail  for,  he  sent  his  wife  to  the  store 
to  follow  it  up,  and  she  found  when  the  garment  was  produced 
from  the  case,  that  the  price  tag  upon  it  was  $425.00. 

Another  instance  is  a  local  haberdasher  who  does  business  in 
a  store  located  near  my  office,  who  had  secured  a  lot  of  gloves 
of  fairly  good  quality  at  a  low  price,  and  thinking  that  he  would 
stimulate  sales  and  favor  his  customers,  he  places  a  50  per  cent 
profit  upon  them,  and  offered  them  as  a  bargain  sale.  Customers 
came  in,  looked  over  the  gloves,  and  said  they  wanted  something 
better,  etc.  About  that  time  he  noticed  in  the  window  of  a  neigh- 
boring store  gloves  of  about  the  same  quality,  at  a  very  much 
higher  price ;  so  he  returned  to  his  store,  withdrew  the  sale,  and 
increased  the  price  400  per  cent,  after  which  the  gloves  went  off 
like  hot  cakes. 

Another  instance  is  that  of  a  friend  of  mine — the  president  of 
a  company  doing  business  here  in  New  York — who  has  been 
in  the  habit  of  purchasing  shoes  from  the  "XYZ"  store,  where 
he  bought  three  pairs  at  a  time,  for  which  he  had  always  paid 
$8.00  a  pair. 

Something  over  two  years  had  elapsed,  and  he  went  to  the 
store  to  purchase  his  usual  allotment,  but,  as  he  says,  fortunately 
he  asked  the  price  before  telling  the  clerk  to  wrap  them  up  and 
send  them  to  him  and  charge  to  his  account,  and  he  was  told 
that  the  price  was  $24.75  per  pair.  He  asked  how  they  arrived  at 
such  an  exhorbitant  figure,  and  was  told,  $23.50  for  the  shoes 

[679] 


168 


RAILROAD  LEGISLATION  [Vol.  VIII 


and  $1.25  tax,  and  further,  that  leather  was  higher  and  that  they 
had  to  pay  at  the  factory  double,  and  even  more,  the  cost  of  former 
prices  paid  to  their  various  classes  of  employees  who  made  the 
shoes ;  whereupon  he  told  the  clerk  to  keep  the  shoes,  as  he  had 
no  use  for  them,  and  went  to  another  store,  where  a  shoe  of 
about  the  same  appearance  was  displayed  in  the  window  for 
$8.00.  He  tried  them  on,  and  found  they  were  satisfactory  so 
far  as  he  was  concerned,  and  then  asked  how  it  happened  that  in 
the  other  store  he  had  been  asked  the  larger  price.  The  clerk 
replied  that  the  other  store  which  carried  a.  higher  grade  of 
goods,  did,  in  fact,  have  a  slightly  better  grade  of  leather,  but 
that  all  of  the  costs  in  the  manufacture  at  the  factory  were  ex- 
actly the  same  for  the  reason  that  the  various  unions  adjusted 
and  settled  that  matter,  so  that  all  of  the  difference  above  $8.00, 
except  for  the  better  grade  of  leather  and  tax,  was  on  account 
of  "easy  money." 

And  I  might  go  on  with  many  similar  illustrations  of  actual 
occurrences.  Profiteering  gets  no  farther  than  the  other  party 
is  willing  to  permit  it,  or  deliberately  aids  and  abets  it  by  his 
patronage. 

Profiteering?  Yes,  that  is  the  word  if  we  wish  to  use  it, 
and  I  know  of  no  reason  why  railroad  men  should  be  segregated 
from  every  other  class,  while  the  grab  for  increased  wages  to 
keep  up  with  the  increasing  high  cost  of  living  is  going  on;  and 
as  compared  with  the  so-called  profiteering  of  certain  other 
classes,  the  railroad  men  are  the  veriest  pikers,  and  have  not  yet 
learned  even  the  rudiments  of  the  act. 

The  only  plea  upon  which  such  conduct  might  be  justified  is 
that  it  is  the  spirit  of  the  times,  and  that  we  are  living  in  these 
times,  and  following  the  old  adage,  of  "When  in  Rome,  do  as 
the  Romans  do."  But  this  is  no  answer,  and  I  do  not  approve  nor 
adopt  any  such  principle,  and  do  not,  by  any  means,  excuse  nor 
justify  the  vicious  circle. 

The  present  situation  will  not  continue.  Unquestionably,  and 
as  surely  as  the  fact  that  we  are  sitting  in  this  room,  prices  and 
wages  will  come  down.  Everybody  knows  that,  and  believes  it, 
and  will  welcome  the  time.  I  will  say,  however,  right  here,  that  I 
do  not  believe  that,  at  least  for  some  time  to  come,  the' wages 
will  fall,  generally,  to  the  pre-war  level. 

History  repeats  itself,  and  I  will  read  to  you  an  abstract  from 
an  editorial  appearing  in  yesterday  morning's  "Sun" ;  it  is  a  quo- 

[680] 


No.  4]   RELATIONS  OF  RAILROADS  AND  THEIR  EMPLOYEES         169 

tation  taken    from    Colonel    Emmons    Clark's    "History   of    the 
Seventh  Regiment"  (1890:  published  by  the  Regiment)  : 

The  inflation  of  the  currency  of  the  country  during  the  war  (1861- 
65)  and  the  consequent  extraordinary  speculation  and  increase  in  nominal 
values  terminated  in  a  great  financial  panic  in  1873,  which  prostrated 
business,  undermined  credit  and  deranged  the  channels  of  trade  and 
commerce. 

Habits  of  extravagance  had  been  acquired  by  all  classes  of  the  people, 
and  none  cheerfully  submitted  to  a  reduction  of  income  and  to  the  en- 
forced economy  which  were  the  natural  results  of  the  great  change  in  the 
financial  and  business  affairs  of  the  country. 

For  many  years  labor  had  been  in  great  demand,  and  had  been  extrava- 
gantly rewarded,  and  by  means  of  trade  societies  had  been  able  to  dictate 
terms  to  employers. 

But  with  the  prostration  of  business  the  supply  of  labor  exceeded  the 
demand;  the  reduction  in  wages  was  stoutly  resisted,  and  the  year  1877 
witnessed  a  general  strike  among  the  railroad  employees  of  the  country 
which  threatened  to  entirely  paralyze  trade  and  to  result  in  great  sacrifice 
of  life  and  property. 

The  idle  and  vicious  hastened  to  enlist  under  the  banners  of  those 
who  demanded  higher  wages,  and  by  riotous  demonstrations  and  by  acts 
of  pillage  and  wanton  destruction  brought  discredit  upon  honest  labor. 

The  communists,  largely  recruited  of  late  from  Europe,  also  availed 
themselves  of  the  opportunity  to  swell  the  excitement  and  in  threatening 
language  to  promulgate  their  theories  of  liberty  and  equality. 

In  many  cities  the  mob  obtained  complete  control  and  successfully 
resisted  the  civil  authorities  and  the  military  ordered  to  their  support. 

The  small  number  of  regular  troops,  the  entire  absence  of  organized 
militia  in  some  States  and  the  inefficiency  of  local  troops  in  many  cases 
or  their  sympathy  with  the  rioters  left  a  large  part  of  the  country  ex- 
posed to  the  dangers  incident  to  periods  of  disorder. 

About  the  first  of  August  peace  was  restored,  ******, 
generally  by  fatigue,  exhaustion  and  reaction  which  naturally  follow  a 
prolonged  disturbance. 

Dozens  of  our  employees  have  said  to  me,  "Give  us  back  the 
old  times  and  conditions,  and  you  can  have  the  increased  wages 
which  we  have  received,  but  which  have  been  of  no  real  benefit." 
Fundamentally,  our  people  are  sound  at  heart,  but,  of  course,  no 
one  wants  to  be  the  first  in  a  surrender  of  the  present  wage,  and 
before  a  dollar  has  increased  in  its  purchasing  power. 

But  it  will  come,  just  as  it  always  has  come.  The  first  step, 
as  has  so  repeatedly  been  pointed  out,  should  be  through  in- 
creased production,  whereby  a  greater  number  of  articles  or  units 
or  the  larger  volume  of  output  shall  be  secured  at  no  consider- 
ably increased  cost  of  production. 

I  will  not  take  the  time  to  go  into  the  general  details  of  this 
problem,  other  than  to  say  that  since  the  only  article  which 
railroad  men  produce  is  transportation,  there  must  be  in  this, 
as  well  as  in  other  lines,  a  greater  production  at  a  no  greater 
cost.  And  to  this  end,  the  men,  or  their  leaders  who  advise  them, 
must   desist    from   their   efforts   to    limit   increased   production 

[681] 


170  RAILROAD  LEGISLATION  [Vol.  VIII 

through  such  methods  as  demanding  the  shortening  of  trains  to 
fifty  cars,  or  of  speeding  up  of  slow  freight  to  a  standard  of 
miles  per  hour,  which  they  know  better  than  anyone  else  cannot 
be  secured  or  maintained  except  by  lessening  the  load,  which 
defeats  the  possibility  of  a  lesser  cost  per  unit,  which  the  in- 
creased size  of  locomotives  and  greater  length  of  trains  were  de- 
signed to  effect. 

In  a  democratic  form  of  government,  we  give  up  some  of 
our  individual  rights  and  wishes  or  preferences  for  the  good  of 
the  many ;  and  in  this  matter  of  increased  production,  the  railroad 
men  must  join  with  their  brother  co-laborers  in  other  fields,  and 
each  do  their  part  in  this  direction,  in  order  that  all  may  benefit 
thereby.  If  this  is  not  done,  then  in  no  other  way,  except  by  an 
immediate  and  direct  cut  in  wages,  will  it  be  possible  to  secure 
lower  freight  rates,  and  although  a  freight  rate  is  but  an  in- 
finitesimal part  of  the  price  of,  for  example,  a  pair  of  shoes,  it 
has  its  effect,  and  in  the  aggregate,  when  all  other  crafts  must 
similarly  be  advanced  to  meet  on  their  part  even  such  an  in- 
finitesimal amount,  the  aggregate  becomes  a  very  large  sum. 

In  a  recent  editorial  in  the  "Sun,"  there  appeared  the  fol- 
lowing : 

As  a  matter  of  cold,  hard  fact  the  railroads  never  underpaid  their  labor 
and  their  labor  never  tried  to  pillage  the  railroads  until  the  Government 
began  to  take  out  of  the  hands  of  the  railroads  the  duties  and  functions 
which  belonged  to  the  railroads. 

As  a  matter  of  cold,  hard  fact  the  American  railway  system  never 
mortgaged  its  body,  life  and  soul  to  gratify  the  exactions  while  stimulat- 
ing the  excesses  of  labor  union  leaders.  It  was  the  Government  itself, 
after  it  took  the  railroads  away  from  their  owners,  which  did  that  very 
thing  as  a  gross  political  gamble. 

I  quote  these  two  paragraphs  for  the  reason  that,  as  I  have 
previously  stated,  there  is  a  cause  or  reason  for  every  subsequent 
effect. 

By  an  Act  of  Congress  authorizing  him  to  do  so,  the  President 
by  proclamation,  took  possession  and  assumed  control  of  the 
principal  lines  in  the  United  States  at  12  o'clock  Monday,  De- 
cember 28,  1917;  and  in  his  statement  accompanying  the  procla- 
mation, he  said,  among  other  declarations,  that — 

The  Secretary  of  War  and  I  are  agreed  that  all  the  circumstances 
being  taken  into  consideration,  the  best  results  can  be  obtained  under  the 
immediate  executive  direction  of  the  Honorable  William  G.  McAdoo, 
whose  practical   experience  peculiarly  fits  him   for  the   service.     *    *    * 

I  call  upon  the  gentlemen  present  here  to-day  to  bear  witness 
to  the  fact  that  in  every  successful  enterprise,  be  it  commercial, 

[682] 


No.  4]    RELATIONS  OF  RAILROADS  AND  THEIR  EMPLOYEES         171 

social,  financial,  political,  military,  agricultural,  or  otherwise,  of 
which  they  may  have  had  any  personal  knowledge,  there  is,  and 
of  necessity  must  be,  at  its  head  a  master  mind,  thoroughly 
competent  to  manage  and  direct  its  affairs,  and  around  which 
revolves  the  entire  organization. 

When  taken  over  by  the  Government,  there  were  approxi- 
mately 1,300  Railroad  Companies,  with  about  260,000  miles  of 
railroad,  worth  between  18  and  20  billions  of  dollars,  repre- 
sented by  9  billion  dollars  of  stock,  and  owned  by  650,000  share- 
holders. For  several  years  we  had  in  this  country  heard  much 
about  the  wasteful  extravagances  and  incompetency  of  railroad 
management,  and  that  a  million  dollars  a  day  might  be  saved, 
and  so  on  and  so  forth,  that  there  had  come  to  be  in  the  minds 
of  many  people  an  idea  that  if  the  Government  might  take  over 
and  run  the  railroads,  all  of  this  much-to-be-desired  improvement 
would  result. 

It  was  in  the  railway  fiscal  year  1911,  that  Louis  D.  Brandeis 
made  famous  the  proposition  that  by  scientific  management  the 
railways  could  save  one  million  dollars  a  day.  At  that  time  the 
operating  expenses  of  the  railways  were  $5,250,000  a  day,  wages 
being  $3,311,000  a  day. 

The  first  year  of  operation  by  the  United  States  Railroad  Ad- 
ministration ended  on  January  1,  1919.  Operating  expenses  had 
grown  to  $1 1,300,000  a  day,  wages  being  $7,500,000  a  day.  Since 
which  time,  with  the  further  increases  that  have  been  made,  and 
costs  of  material  being  no  less,  both  expenses  and  wages  are 
correspondingly  greater. 

And  now  we  come  back  again  to  the  two  paragraphs.  If  the 
substance  thereof  is  true,  or  only  half  true,  what  is  the  reason? 
In  my  opinion,  there  is  only  one  answer:  Blundering,  bungling 
incapacity  in  high  places. 

A  blunder  is  to  move  or  act  blindly,  stupidly  or  without  direc- 
tion, or  steady  guidance,  and  such  conduct  is  compatible  with 
the  inexperience  of  childhood,  and  which  is  more  often  than 
otherwise,  laughingly  excused  for  that  reason.  But  there  are 
shades  or  degrees  of  blunders!  Thus  there  is  error,  which  is  a 
wandering  from  truth,  primarily  in  impression,  judgment,  or 
calculation,  and  by  extension  of  the  idea  in  conduct.  Again, 
there  is  mistake,  which  is  the  false  judgment  or  choice,  and  does 
not,  as  error  sometimes  does,  imply  moral  obliquity.  Now  that 
we  have  had  practical  experience  with  it,  we  can  note  the  blun- 

[683] 


172  RAILROAD  LEGISLATION  [Vol.  VIII 

dering  that  has  taken  place  under  the  mistaken  impression  that 
it  was  the  real  article  in  railroading.  Also,  the  blundering  in  the 
dissipation  of  the  $500,000,000  revolving  fund. 

Further,  the  bungling  of  the  wage  demands  which,  because 
of  failure  to  comprehend  the  question,  resulted  in  absurd  read- 
justments and  the  granting  of  schedules  of  wages  for  certain 
classes  without  due  regard  to  the  character  of  the  service  per- 
formed, thus  establishing  inappropriate  and  extravagant  meas- 
ures of  compensation  that  caused  discontent  in  other  classes. 

And  again,  the  bungling  in  the  handling  of  the  railroad  labor 
problem.  With  the  advent  of  the  Director  General  a  very  ex- 
tensive system  was  inaugurated  for  handling  railroad  wage  and 
labor  problems;  which  reminds  me  of  another  true  story  which 
transpired  several  years  ago,  when  a  new  Vice  President  in 
charge  of  Operation,  entered  the  service  of  an  old  railroad  sys- 
tem which  was  running  along  in  fairly  smooth  shape.  In  addition 
to  inaugurating  a  large  number  of  so-called  reforms,  patterned 
after  the  railroad  upon  which  he  had  previously  been  employed, 
he  thought  it  necessary  to  purchase  a  new  100-ton  steel  wrecking 
derrick,  to  replace  the  old  derrick,  with  its  wooden  masts  and  light 
capacity  booms, — upon   which   the   comment  was  very   shortly 

thereafter  made,  "Well,  by  G ,  he's  had  use  for  that  derrick 

every  minute  of  the  time  since." 

Many  years  ago  a  gentleman  who  had  written  ably  and  argued 
plausibly  on  the  difficulties  which  as  of  that  day  confronted  the 
railroads,  was  rewarded  for  his  efforts  by  being  elected  President 
of  one  of  our  railroads.  I  will  not  go  into  the  details  of  what 
occurred,  but  the  verdict  given  after  his  demonstrated  failure 
and  removal  from  office,  was  that,  "He  had  attempted  to  run  the 
railroad  with  girl  stenographers  and  college  graduates."  It  was 
simply  a  case  of  inexperience  vs.  practical  experience,  and  of  the 
square  peg  in  the  round  holer 

It  is  estimated  that  there  are  employed  in  all  grades,  lines  of 
service,  and  in  various  capacities  upon  the  railroads,  approxi- 
mately 2,000,000  persons,  or  about  2  per  cent,  of  the  total  popula- 
tion of  the  country,  and  of  this  number,  prior  to  the  government's 
taking  over  the  railroads  as  an  alleged  war  necessity,  probably 
not  to  exceed  400,000  were  organized  and  members  of  the  then 
existing  brotherhoods  and  other  railroad  organizations. 

Immediately — with  the  advent  of  the  Railroad  Administration 
— the  greatest  campaign   of   organization   ever  known   became 

[684] 


No.  4]    RELATIONS  OF  RAILROADS  AND  THEIR  EMPLOYEES         173 

effective.  Ten  new  organizations  have  been  formed  and  others 
are  in  process.  The  passage  of  the  Adamson  Law  in  1916,  with 
its  hitherto  unknown  feature  of  back  pay  allowances,  involving 
vast  sums  of  money,  was  a  sufficient  example  and  allurement. 

The  Director  General  even  capitalized  the  novelty  when  as 
Secretary  of  the  Treasury  he  appealed  to  the  men  to  invest  the 
money  in  Liberty  Loan  Bonds,  the  campaign  for  which  was 
going  on. 

The  great  Pennsylvania  Railroad,  which  had  always  paid  its 
employees  the  highest  going  rates,  and  whose  shop  men  had 
never  found  it  either  necessary  or  desirable  to  organize,  was 
unionized  from  end  to  end;  and  from  the  great  Altoona  shops, 
always  non-union,  came  a  telegram  to  the  Director  General  con- 
veying its  felicitation  and  announcing  that  McAdoo  Lodge  No. 
1,  Brotherhood  of  Boilermakers,  had  received  its  charter.  What 
is  true  of  the  Pennsylvania  Railroad,  is  equally  true  of  all  the 
others. 

Like  the  100-ton  derrick,  the  Labor  and  Wage  Adjustment 
Board  had  had  its  full  100  per  cent,  of  service  ever  since  its  crea- 
tion, and  the  orders,  interpretations,  supplements,  and  interpreta- 
tions of  supplements,  etc.,  have  been  issued  in  such  volume  that  it 
is  currently  reported  that  the  men  themselves  do  not  understand, 
and  in  many  cases  cannot  calculate  the  wages  they  are  supposed 
to  receive  thereunder. 

The  rank  and  file  of  employees  have  never  asked,  and  do  not 
want  a  place  on  the  Board  of  Directors.  It  involves  the  re- 
sponsibility which  comes  only  with  ownership ;  and  as  to  the 
success  or  failure  of  the  enterprise,  a  labor  leader  here  in  New 
York  recently  stated  that  the  financial  difficulty  which  con- 
fronted the  company  was  of  no  concern  to  the  men,  and  that  a 
receiver's  wages  were  just  as  good  and  acceptable,  as  the  com- 
pany's. What  the  men  want  is  a  voice  in  the  matter  of  their 
wages  and  conditions  of  employment,  and  this  they  already  enjoy. 

And  the  word  which  has  been  passed  around  is  that  the  men 
would  prefer  the  simple  and  direct  form  of  negotiation  with  their 
own  officers,  who  understand  local  conditions,  and  have  a  sym- 
pathetic interest  in  their  welfare  and  in  adjusting  their  working 
conditions,  so  as  to  make  possible  the  greatest  degree  of  comfort 
and  happiness  in  their  home  lives.  This  arrangement  does  not  at 
all  preclude  the  possibilities  of  usefulness  of  their  existing  or- 
ganizations. 

[685] 


174  RAILROAD  LEGISLATION  [Vol.  VIII 

In  the  hands  of  sober-minded,  serious-thinking  men  serving 
as  officers  of  their  local  organization,  there  is  quick  and  im- 
mediate action  possible  in  reaching  a  mutual  understanding  in 
those  cases  where  such  a  course  is  necessary  and  desirable;  and 
in  my  experience  I  have  found  that  the  men  themselves  know  as 
well,  or  better  than  the  officers,  who  is  the  person  or  persons 
responsible  for  trouble  or  an  accident,  and  whether  the  discipline 
which  is  applied -is  merited  and  well  deserved,  or  whether  there 
has  been  a  miscarriage  of  justice,  and  a  man  not  guilty  has  been 
punished. 

And  I  will  say  further,  that  I  have  never  known  of  a  case 
where  sure  and  swift  discipline  was  properly  applied,  with  the 
element  of  mercy  interjected,  as  should  always  be  the  case  by 
reason  of  the  third  party, — the  man's  family,  if  he  has  one — 
being  made  a  co-sufferer, — that  it  has  not  had  the  endorsement  of 
the  men  themselves;  and  the  most  that  the  grievance  committee 
will  undertake  is  to  ask  for  as  much  leniency  as  in  the  opinion 
of  the  officers  the  seriousness  of  the  offense  may  permit. 

Now,  a  few  remarks  on  the  subject  of  pending  labor  legisla- 
tion: 

In  my  opinion,  the  provisions  of  the  original  Esch  Bill  concern- 
ing labor  adjustments  are  impractical  and  impossible,  and  I  confi- 
dently predict  their  failure  and  ultimate  discard.  Any  system 
which  requires  the  President  to  appoint  members  upon  a  board 
or  commission  at  once  opens  the  door  for  "deserving  politicians," 
and  is  fatal  to  real  accomplishment. 

The  problems  involved  are  great,  but  they  could  be  met  suc- 
cessfully if  there  were  a  disposition  to  apply  to  them  the  knowl- 
edge gained  in  the  school  of  experience.  But  instead  of  profiting 
thereby,  most  of  our  politicians  are  either  trimming,  or  are 
openly  following  dreamers,  who  having  no  proper  conception 
of  the  magnitude  of  their  task  or  the  perils  invited,  propose,  in 
effect,  nothing  better  than  government  ownership,  with  its  in- 
evitable results  of  debt,  extravagance,  spoils,  favoritism  and  in- 
efficiency. 

All  over  the  world  the  difficulties  with  respect  to  the  labor 
problem  are  practically  alike.  In  England  there  is  controversy 
between  the  Government  and  the  labor  leaders  over  the  Tem- 
porary Wage  Regulation  Act,  which,  in  its  provision  for — 

The  establishment  by  the  Government  of  an  Industrial  Arbitration 
Board,  whose  decisions  shall  be  final  and  binding  against  any  subsequent 
actions,  such  as  strikes  and  lockouts;  also,  that  the  unions  shall  agree  to 

[686] 


No.  4]    RELATIONS  OF  RAILROADS  AND  THEIR  EMPLOYEES         175 

refer  all  disputes  to  this  tribunal,  with  penalties  for  failure  ranging  from 
sequestration  of  funds  and  liability  of  officers  and  members  to  prosecution, 
to  validating  the  provisions  of  the  Trades  Disputes  Act  in  certain  eventu- 
alities, 

and  which,  in  its  ramifications,  endeavors  in  its  fashion  to  meet 
the  like  situations  as  they  have  arisen  in  our  own  country. 

A  recent  dispatch  from  Washington  is  to  the  effect  that  Sena- 
tor Cummins  says  he  contemplates  an  extension  of  the  anti- 
strike  provision  in  his  bill  to  the  basic  industries  of  the  United 
States,  including  the  production  of  fuel,  iron  and  steel,  foodstuffs, 
lumber  and  building  materials,  and  clothing. 

An  ancient  law  giver  who  had  handed  down  to  the  people  a 
new  system  of  law,  was  asked  why  he  provided  no  punishment 
for  one  who  should  slay  his  parent,  made  reply  that  he  had  not 
provided  a  penalty  for  such  an  act,  as  he  did  not  contemplate  that 
anyone  would  do  such  a  thing. 

And  this  suggests  to  me  a  thought  that  as  continuity  of  service 
is  what  the  people  of  this  country  desire,  and  intend  to  have,  and 
by  the  various  enactments  which  have  bound  capital  when  en- 
gaged in  the  business  of  transportation  in  such  a  way  that  it  may 
not  escape  or  stop  or  cease  in  its  performance,  we  might,  with 
plausibility,  assume  with  the  ancient  law  giver,  that  when  labor 
enters  into  the  business  of  furnishing  its  necessary  part  in  the 
performance  of  transportation,  and  with  a  full  knowledge  of  the 
situation  at  the  time  it  so  enters,  there  shall  be  no  necessity  to 
provide  an  anti-strike  law,  for  no  one  contemplates  that  labor 
having  entered  such  service,  a  penalty  for  such  a  crime  will  be 
necessary,  and  that  the  sacred  principle  of  continuity  of  service 
is  assumed  alike  by  capital  and  labor  when  they  come  together  in 
the  quasi-public  service  of  furnishing  transportation. 

Manifestly,  no  man  may  be  compelled  to  labor  against  his 
will,  for  unless  he  be  a  convict  in  a  penal  institution,  it  would  be 
enslavement.  In  a  recent  proposition  of  somewhat  similar  nature 
wherein  a  few  members  of  a  society  refused  to  act  in  concord 
with  the  society  as  a  whole,  someone  made  the  suggestion  that. 
"There  were  birds  which  could  sing,  but  who  wouldn't  sing,  and 
the  thing  to  do  was  to  make  them  sing,"  and  the  way  to  ac- 
complish this  was  by  setting  the  other  members  of  the  society  upon 
them,  and  through  the  medium  of  persuasion  and  the  effect  of 
public  sentiment,  inducing  the  recalcitrants  to  change  their  views 
or  else  get  out ! 

Someone  has  suggested  profit  sharing  as  the  panacea,  but  I 

[687] 


176  RAILROAD  LEGISLATION  [Vol.  VIII 

am  entirely  opposed  to  that  plan,  or  any  other  paternalistic 
method ;  and  it  is  also  clear  that  a  large  majority  of  labor  leaders 
and  their  lawyers  do  not  want  it. 

What  labor  desires,  as  is  evidenced  in  every  controversy,  and 
in  all  of  the  wage  adjustments  at  Washington,  is  the  certainty  of 
fixed  wages! 

If  profit  sharing  is  established,  they  feel  that  gradually  the 
equity  of  sharing-  losses,  as  well  as  profits,  will  be  forced  upon 
them,  and  that  in  adjusting  wage  scales  the  sharing  of  profits  will 
be  a  factor  tending  to  lower  the  fixed  wage ;  that  by  even  sharing 
profits  without  sharing  losses,  they  become,  in  a  sense,  co-part- 
ners, but  if  not,  they  would  clearly  be  joint  adventurers  with 
capital,  and  thus  constitutionally  become  subject  to  the  same 
regulations  as  capital  and  its  owners. 

The  enactment  of  the  Adamson  law  was  a  grave  mistake ;  it 
is  class  legislation  pure  and  simple.  All  class  legislation  is  per- 
nicious, and  has  no  place  in  a  democracy,  and  wherever  it  exists 
it  should  be  wiped  out.  We  hear  judges  repeatedly  charge  juries 
that  the  parties  to  the  suit  or  proceedings  are  equal  in  the  eye  of 
the  law  and  each  entitled  to  exactly  the  same  measure  of  justice. 
This  is  but  repeating  in  different  words  a  declaration  of  our  bill 
of  rights.  Apparently  exceptions  have  been  engrafted  on  this 
doctrine  in  the  shape  of  class  legislation,  enacted  by  way  of  ex- 
emptions or  prohibitions  tacked  to  enactments.  They  should  be 
wiped  out  from  top  to  bottom,  including  all  exemptions  from 
taxation,  and  freedom  from  services. 

It  is  declared  that  there  shall  be  no  taxation  without  representa- 
tion. Very  well;  but  there  must  also  be  a  rule  that  there  shall 
be  no  representation  without  taxation,  and  no  representation 
without  service.  This,  of  course,  will  tax  charitable,  religious, 
educational  and  kindred  activities.  This  is  intended,  and  it  will 
serve  a  helpful  purpose  in  promoting  thought  activity  and  greater 
service.  Exemptions  are  nothing  more  than  a  subsidy,  and,  like 
all  subsidies,  insidious,  leading  to  laxity  and  inertia  and  other 
disorders  that  need  not  be  enumerated. 

Several  years  ago  I  clipped  the  following  paragraphs  which 
appeared  in  one  of  our  leading  papers: 

The  country  really  possesses  a  fair  skeleton  machinery  for  all  the  ordi- 
nary activities  of  life,  and  not  a  bad  one  for  war  work,  if  friction  and 
obstruction  did  not  develop  from  individual  dilatoriness,  conceit,  and 
perversity. 

The  solution  of  the  existing  difficulties  is  to  be  found,  we  believe,  in 
using  the  existing  facilities  fully  and  intelligently,  and  in  the  natural  way, 

[688] 


No.  4]    RELATIONS  OF  RAILROADS  AND  THEIR  EMPLOYEES         177 

W 

rather  than  in  distorting  them  to  novel  uses,  for  which  they  are  not 
adapted,  or  in  creating  improvised  instruments  and  methods,  necessarily 
crude  and  hasty,  to  perform  functions  that  have  been  carried  on  for  years 
satisfactorily  in  the  old  way. 

We  take  it  there  are  men  of  ability  and  experience  in  the  United  States, 
who  are  capable  of  meeting  almost  any  emergency  with  the  means  at  com- 
mand, or  by  a  proper  evolution  thereof,  if  their  brains  and  energy  be  not 
paralyzed  by  the  dictation  of  formalists  and  visionaries.  Why  not  give 
the  real  men  a  chance?  Why  must  everything  be  done  in  some  new  or 
experimental  way,  after  a  crisis  has  been  forced  by  obstruction  of  the 
recognized  and  hitherto  effectual  devices? 

with  which  I  concur,  and  now  reach  my  conclusion  in  the  fol- 
lowing summary: 

(1)  The  relations  between  the  railroads  and  their  employees 
are  per  se  generally  satisfactory,  or  can  be  made  so. 

(2)  That  a  large  majority  of  the  rank  and  file  desire  to  have 
the  railroads  returned  to  their  owners  and  former  relations 
restored. 

(3)  The  charge  that  railroad  men  are  profiteering  is  no  more 
deserved  than  a  similar  charge  against  practically  every  other 
class  of  labor  might  be  deserved. 

(4)  That  to  do  their  part  toward  reducing  the  high  cost  of 
living,  the  employees  in  railroad  service  should  actively  co- 
operate in  those  efforts  and  measures  which  will  increase  the 
volume  of  transportation  produced  without  further  increasing 
the  cost  of  production. 

(5)  That  the  taking  over  of  the  railroads  by  the  Government 
as  an  alleged  war  measure  was  a  blunder,  which  its  now  ac- 
knowledged failure  demonstrates  and  proves. 

(6)  That  the  brotherhoods  under  conservative  leadership  can 
be  made  the  medium  for  constructive  effort  to  the  mutual  advan- 
tage of  the  company  and  its  employees. 

(7)  That  the  labor  provisions  of  the  Esch  Bill  are  impractical 
and  impossible  of  accomplishment. 

(8)  That  all  class  laws  should  be  repealed. 

(9)  That  the  government  should  keep  hands  off  and  confine 
itself  to  its  proper  function  of  governing. 

(10)  And  lastly,  that  we  subscribe  to  and  endorse  the  oft 
repeated  declaration  as  printed  in  the  New  York  "Sun,"  that  in 
the  conduct  of  business  matters : 

"The  touch  of  the  hand  of  government  is  the  touch  of  death." 


[689] 


THE  ADJUSTMENT  OF  LABOR  CONTROVERSIES 

W.  N.  DOAK 
Vice-President   Brotherhood   of   Railroad   Trainmen 

1AM  indeed  very  glad  to  have  this  opportunity  of  saying 
a  few  words  to  the  business  men  and  business  women  of 
our  country,  and  to  try  if  possible,  to  present  the  labor 
viewpoint  on  certain  subjects.  The  subject  assigned  me  is  that  of 
wage  adjustments  and  employment  conditions  on  the  American 
railroads.  And  if  by  chance,  Mr.  Chairman,  I  should  happen 
to  overlook  my  course  and  get  on  the  time  of  Mr.  Lee's  train, 
I  hope  that  you  will  call  on  Dr.  Lindsay,  because  he  was  warned 
when  he  assigned  this  subject  to  me  that  I  may  get  by  my  time. 
And  if  that  does  not  settle  the  question,  I  shall  ask  Dr.  Johnson 
and  some  of  these  good  gentlemen  that  have  served  on  boards 
of  arbitration  to  arbitrate  my  case  for  me. 

I  wish  to  speak  to  you  to-day,  as  an  American  citizen,  from 
the  standpoint  of  an  American  citizen,  on  distinctly  an  American 
question.  First  of  all,  I  hope  none  of  you  will  think  that  the 
gentleman,  the  member  of  Congress,  expressed  fully  and  com- 
pletely the  sentiments  of  railroad  employees  when  he  made  the 
assertion  last  night  that  there  was  an  attempt  on  the  part  of  rail- 
road employees  to  Russianize  America.  There  is  not  a  man,  or 
woman  among  you  that  detests  the  principles  of  bolshevism, 
radicalism  or  anarchy  more  than  I  do.  There  is  not  one  among 
you  that  will  go  any  farther  to  eliminate  those  doctrines  from  our 
country  than  I  will. 

Fortunately  I  have  some  views  on  this  subject  that  it  is  not 
necessary  to  apply  specifically  to  the  Plumb  Plan,  to  Government 
ownership  or  Government  control.  My  views  will  apply  to  any 
of  them.  I  wish  to  speak  of  the  experience  of  America  in 
handling  and  adjusting  labor  disputes  on  American  railways, 
and  incidentally  to  draw  a  comparison  with  the  experience  of 
other  countries.  I  hope  you  will  bear  with  me  for  a  few  minutes, 
so  that  I  may  be  able  to  convince  you  that  America  has  had,  and 
will  continue  to  have,  the  best  methods  of  settling  these  ques- 
tions. 

I  heard  President  Besler  refer  to  the  English  system  a  few 
minutes  ago.    I  should  not  recommend  that  system  to  the  United 

[690] 


No.  4]  THE  ADJUSTMENT  OF  LABOR  CONTROVERSIES  179 

States,  because  recently  in  Great  Britain  all  of  the  railroad  em- 
ployees went  out  on  a  strike.  That  incident  within  itself  is 
enough  to  convince  you  that  we  have  something  better  in 
America. 

There  is  no  danger  of  having  strikes  on  the  railways  in  Amer- 
ica if  you  will  approach  the  labor  problem  from  an  American 
standpoint,  and  disregard  the  false  sentiment  which  has  been 
built  up  in  this  country  by  means  of  propaganda  that  is  detri- 
mental to  the  true  interest  of  the  American  public.  There  is  not 
one  scintilla  of  truth,  and  there  has  not  been  one  scintilla  of 
truth  in  the  reports  that  have  been  heralded  over  this  country 
that  there  is  a  threatened  railroad  strike  to  compel  the  adoption 
of  the  Plumb  Plan,  or  of  any  other  plan. 

I  heard  with  great  interest  President  Besler's  statement  that 
he  was  opposed  to  the  original  labor  provisions  of  the  Esch  Bill. 
I  heard  a  gentleman  say  last  night,  that  the  labor  provisions  of  the 
Esch  Bill  as  passed  by  the  House,  would  not  work.  The  proof 
of  the  pudding  is  the  eating.  That  plan  has  worked  for  the  last 
three  and  one-half  or  four  years,  both  under  private  ownership 
and  under  governmental  control,  without  a  single  stoppage  of 
traffic  on  any  of  the  American  railroads.  You  doubtless  heard 
the  statement,  that  the  Esch  Bill  was  a  piece  of  legislation,  which, 
if  finally  enacted,  would  give  the  railroad  brotherhood  chiefs  the 
whip  hand  and  prevent  the  carriers  from  getting  into  court. 
I  am  extremely  sorry  that  the  gentleman,  who  made  this  remark, 
did  not  fully  consider  the  matter  before  his  statement  was  made. 

After  a  study  of  all  plans  and  all  forms  of  mediation,  con- 
ciliation and  arbitration  in  the  civilized  world,  I  have  come  to 
the  conclusion  that  there  is  only  one  country  that  handles  the 
labor  question  on  the  railroads  properly,  and  that  country  is  the 
United  States  of  America.  There  has  been  statement  after  state- 
ment carried  in  the  press  that  the  Dominin  of  Canada  has  some- 
thing better.  All  you  have  to  do  is  to  compare  the  conditions  in 
Canada  under  the  Lemuex  Act  with  the  conditions  existing  in 
the  United  States  under  the  Newlands  Act  and  the  old  Erdman 
Act,  and  then  you  will  be  convinced  that  we  had  best  keep  the 
Newlands  Act.  There  has  been  but  one  failure  under  the  New- 
lands  Act  in  the  United  States,  and  an  arrangement  was  reached 
by  the  President  and  Congress  which  prevented  a  strike.  At 
least  ten  per  cent  of  the  disputes  investigated  under  the  Lemuex 
Act  resulted  eventually  in  strikes.     When  the  conductors  and 

[691] 


180  RAILROAD  LEGISLATION  [Vol.  VIII 

trainmen  in  the  Eastern  territory  made  a  concerted  movement 
in  1910  to  secure  an  advance  in  wages,  involving  this  entire 
Eastern  territory, — Canada  as  well  as  the  United  States, — we 
reached  a  settlement  under  the  Newlands  Act  in  the  United 
States,  and  there  was  a  strike  in  Canada  under  the  Lemuex  Act. 
That  should  be  enough  to  convince  you  that  we  have  had  better 
methods. 

I  agree  with  Mr.  Besler  that  it  was  a  most  unfortunate  thing 
that  the  Adamson  Law  was  passed,  because  in  it  Congress  de- 
clared something  that  we  never  wanted  Congress  to  declare. 
You  say  the  railroad  men  were  responsible.  You  have  heard  the 
story  heralded  over  the  whole  country  that  the  railroad  employees 
held  Congress  up  at  the  point  of  a  gun.  It  is  just  the  opposite,  if 
you  please.  We  were  in  this  city  and  would  have  settled ;  pos- 
sibly if  we  had  not  the  show  would  have  gone  on  and  lasted  about 
six  hours  and  would  have  been  over.  The  President  of  the 
United  States  demanded  that  we  come  to  Washington.  He  is 
responsible  and  the  Congress,  for  the  passage  of  the  Adamson 
Law;  it  was  something  that  we  did  not  ask  for — did  not  want. 
But  it  was  passed,  it  was  carried  to  the  courts,  and  the  courts 
said  it  was  constitutional,  but  no  one  has  said  and  no  court  has 
said  to  this  day  how  the  law  should  be  applied. 

We  established  at  that  time  machinery  to  apply  the  Adamson 
Law  and  that  machinery  functioned,  as  you  heard  Mr.  Shea  say 
last  night,  for  a  period  of  over  ten  months,  and  adjusted  nearly 
30,000  disputes,  with  only  three  deadlocks.  When  war  was  de- 
clared, and  the  railroads  taken  over  by  the  Government,  the  work 
of  applying  the  Adamson  Act  was  handed  over  to  another  board. 
Two  additional  boards  were  created,  and  these  boards,  numbered 
one,  two  and  three,  made  adjustments  for  the  various  classes  of 
employees. 

Board  No.  1  was  organized  on  the  8th  day  of  April,  1918, 
Board  No.  2  in  July,  and  Board  No.  3  in  October.  The  three 
questions  which  caused  a  deadlock  in  the  former  board  were 
settled  by  Board  No.  1.  In  addition  this  board  has  settled  1500 
other  disputes,  any  one  of  which  might  have  caused  a  strike.  No 
dissenting  opinion  has  been  rendered  by  any  man  on  the  Board, 
and  so  far  as  the  public  knows  and  so  far  as  I  know  as  a  member 
of  that  Board,  the  decisions  have  all  been  unanimous.  The  same 
thing  is  true  of  Board  No.  2,  and  of  Board  No.  3.  According  to 
latest  reports  there  has  been  over  3100  disputes  settled  by  these 

[692] 


No.  4]  THE  ADJUSTMENT  OF  LABOR  CONTROVERSIES  181 

three  boards  without  a  dissenting  vote  and  without  a  deadlock. 

They  say  that  the  present  Esch  Bill  will  not  work.  I  do  not 
know  whether  it  will  or  not,  but  I  do  know  that  neither  the 
original  Esch  Bill,  nor  the  Cummins  Bill  will  work.  If  you  want 
to  have  chaos  in  this  country,  and  disturb  transportation  in  this 
country,  advocate  and  have  passed  such  legislation  as  was  ori- 
ginally contemplated  in  these  two  bills.  Who  is  advocating  anti- 
strike  legislation,  and  why  ?  We  have  had  strikes  in  other  indus- 
tries, we  have  had  disturbances,  but  we  have  not  had  trouble 
among  the  railroad  employees,  except  for  a  few  illegal,  unau- 
thorized strikes.  Why?  Simply  because  we  have  literally  ad- 
hered to  and  are  to-day  advocating  the  principle  of  direct  nego- 
tiation and  collective  bargaining  between  the  employer  and  the 
employees. 

The  Esch  Bill  as  amended  declares  in  no  uncertain,  but  in  em- 
emphatic  terms:  "It  shall  be  the  duty  of  all  carriers  subject  to 
this  Act,  and  their  agents,  officers  and  employees,  to  exert  every 
reasonable  effort,  and  adopt  every  available  and  reasonable  means 
to  avoid  interruption  to  the  operation  of  a  carrier  subject  to  this 
Act,  growing  out  of  controversy  or  dispute  over  any  question  of 
wages,  working  conditions  or  discipline  of  employees."  Written 
in  the  law !  First  of  all,  they  must  use  every  reasonable  means, 
and  if  failure  results,  then  they  go  to  a  board  of  investigation. 
If  this  board  deadlocks  they  go  to  a  second  board.  No  man  in 
this  country  has  ever  advocated  more  than  one  board  in  all  the 
investigation  acts  that  have  been  proposed.  This  bill  provides 
for  two  boards  and,  if  it  is  passed,  the  public  will  have  the  benefit 
of  investigation  by  two  boards  before  any  interruption  of  traffic 
can  take  place. 

But  we  hear  the  statement  from  every  side :  "These  men  have 
got  to  be  tied  down.  You  will  have  to  enact  anti-strike  legis- 
lation." Such  legislation  was  enacted  in  New  Zealand,  and 
throughout  Australasia,  with  the  result  that  there  were  more 
strikes  than  ever  before.  I  am  not  saying  that  labor  organi- 
zations will  violate  the  law,  but  I  do  say  to  you  as  a  correct 
principle  of  our  constitution  and  form  of  government,  no  law 
can  be  enacted  that  will  prevent  an  employee  from  quitting  his 
employment.  Such  a  law  would  be  so  contrary  and  obnoxious 
to  the  very  spirit  and  intent  of  our  form  of  government  that  it 
could  not  stand.  Such  a  law  would  give  you  exactly  what  you 
do  not  want.     When  you  give  to  the  individual  a  right  to  do 

[693] 


182  RAILROAD  LEGISLATION  [Vol.  VIII 

something  that  you  declare  is  illegal  for  a  number  of  individuals 
to  do,  then  you  have  mob-rule  instead  of  legitimate  organization 
rule  in  your  country. 

There  is  not  a  one  of  the  railroad  labor  organizations  but 
declares  and  enforces  the  rule  that  any  member  participating  in 
an  illegal  or  unauthorized  strike  will  be  expelled  from  the 
organization  and  cannot  again  be  readmitted. 

I  had  hoped  that  this  question  of  adjusting  labor  disputes 
could  be  settled  on  some  reasonable  basis  without  agitation.  I 
had  hoped  that  the  law  providing  for  the  return  of  the  railroads 
to  their  owners,  or  whatever  law  may  be  enacted,  would  not  deal 
with  this  labor  question  at  all.  I  still  hold  those  views.  It  is 
unnecessary — President  Besler  is  entirely  right — it  is  unneces- 
sary to  enact  a  law  dealing  with  the  labor  question.  But  what  we 
hear  down  at  Washington  continually  is.  "The  public  is  demand- 
ing it;  they  have  got  to  have  something."  It  has  kept  us  very 
busy  to  extract  some  of  the  teeth  that  have  been  put  into  the  bills 
introduced  in  Congress. 

Let  me  show  you  how  far  they  have  gone.  We  have  gone 
through  this  war  without  the  slightest  labor  trouble  on  the  rail- 
roads. There  has  been  trouble  in  other  industries,  but  none  on 
the  railroads.  Bills  have  been  introduced  to  punish  striking  rail- 
road employees  by  imposing  penalties  in  the  way  of  fines  of  $500 
to  $10,000  and  imprisonment  up  to  twenty  years,  and  the  last 
thing  that  was  introduced  a  few  days  ago  was  a  bill  by  a  distin- 
guished Senator,  to  have  a  railway  army  of  200,000  regular 
troops  to  operate  the  railroads.  In  other  words,  some  are  not 
satisfied  with  these  many  bills  that  have  been  introduced  inflicting 
all  kinds  of  penalties,  even  to  the  confiscation  of  the  property 
of  the  railroad  employees  in  the  state  of  New  York  if  a  man  goes 
out  on  a  strike  in  the  state  of  Florida.  They  want — if  you  will 
excuse  the  plain  common  everynday  American  language — to  inau- 
gurate a  United  States  Constabulary,  or  as  the  steel  workers  in 
Pennsylvania  state  it,  a  United  States  Army  of  Cossacks  to  ride 
down  the  American  people  on  the  American  railroads.  Is  it  fair? 
Is  it  in  accord  with  American  principles?  Will  it  stand  the  test? 
No !  The  people  would  sooner  or  later  revolt  against  such  laws. 
We  will  observe  the  law.  Pass  any  kind  of  an  anti-strike  law 
you  please,  but  we  shall  try  to  change  Congress,  and  get  the  law 
repealed. 

If  you  but  stay  away  from  this  labor  legislation,  we  shall  get 

[694] 


No.  4]  THE  ADJUSTMENT  OF  LABOR  CONTROVERSIES  183 

along  all  right.  I  have  the  highest  regard  for  the  President  of 
the  Central  Railroad  of  New  Jersey,  and  the  same  feeling  ex- 
tends all  the  way  down  the  line.  There  is  no  feeling  between 
us,  but  some  of  these  people  would  make  you  believe  we  are  at 
one  another's  throats  all  the  time.  Some  of  the  best  friends  I 
have  are  the  executives  and  managing  officers  of  these  railroads. 
If  I  needed  money  I  should  go  to  them  quicker  than  to  anybody 
else.  If  I  needed  advice  along  business  lines  I  should  go  to  them. 
We  shall  get  along  all  right  together  if  you  will  let  us  handle 
our  differences  in  our  own  way. 

My  idea  is  to  create  boards  upon  which  employers  and  em- 
ployees have  an  equal  number  of  representatives,  and  let  them 
settle  these  disputes.  Such  boards  have  functioned  well  in  the 
past  and  would  function  well  in  the  future.  As  I  said  before,  if 
you  cannot  trust  practical  men  to  handle  practical  questions,  how 
do  you  expect  politicians  to  handle  such  questions?  I  am  op- 
posed to  the  creation  of  any  political  board — I  am  opposed  to 
the  government's  paying  any  member  that  sits  on  these  boards. 
Both  sides  should  employ  their  own  men,  compensate  them,  and 
not  let  them  lose  their  personal  contact  with  the  interests  which 
they  represent. 

A  government  board  to  adjust  labor  disputes  will  not  work 
well,  because  a  government  official  cannot  get  into  close  touch 
with  individual  laborers.  My  experience  for  nearly  eighteen 
months  in  handling  these  questions  convinces  me  that  we  have 
the  only  logical,  reasonable  plan,  and  it  should  be  continued. 
If  no  law  is  enacted  we  shall  create  the  boards.  If  the  labor 
provisions  of  the  Esch  Bill,  as  it  stands  at  present,  are  enacted  into 
law,  I  am  sure  that  you  will  have  a  reign  of  peace  on  the  rail- 
roads, and  you  need  have  no  fear  of  labor  troubles. 


♦ 


1695] 


LABOR  AND  THE  DEMOCRATIC  CONTROL  OF 

RAILROADS 

FREDERIC  C.  HOWE 
Director  of  Conference  on  Democratic  Control  of  the  Railroads 

THE  Conference  on  the  Democratic  Control  of  Railroads  is 
not  definitely  committed  to  any  plan.  Its  program  differs 
from  that  of  other  organizations  in  suggesting  that  the 
railroad  problem  is  so  intimately  related  to  the  industrial  life  of 
America  that  there  should  be  delay  in  the  return  of  the  railroads 
to  their  owners  either  for  a  definite  period  or  indefinite  period.  In 
the  interim  a  commission  should  be  created,  made  up  of  all  inter- 
ests, financial,  industrial,  manufacturing,  commercial,  agricul- 
tural, and  labor ;  and  this  commission  should  make  a  study  of  the 
railroad  question,  not  as  a  railroad  problem,  but  as  an  industrial 
problem,  thinking  in  terms  of  the  one  hundred  million  people  of 
the  country — the  manufacturer,  the  farmer,  the  producer — in 
order  that  the  railroads  of  the  country  shall  become  an  agency  in 
which  the  emphasis  is  placed  upon  service  to  the  entire  country. 
The  railroads  should  not  be  treated  as  though  they  were  a  private 
business,  similar  to  a  bank,  a  department  store,  a  hotel,  or  some 
other  private  agency. 

In  other  words,  our  organization  is  emphasizing  the  need  of 
the  entire  country  for  a  means  of  circulation,  organized  so  that 
it  will  radiate  to  the  smallest,  most  obscure  village,  to  the  smallest 
producer,  so  that  he  will  have  at  hand — close  at  hand — a  sympa- 
thetic instrument,  not  only  for  the  hauling  of  his  wealth,  but  the 
hauling  of  his  person,  wherever  it  should  go.  And  we  are  urging 
upon  Congress  that  it  stay  its  hand,  as  was  done  in  the  matter  of 
banking  and  currency  legislation,  until  this  critical  agency,  the 
most  critical  of  all  the  agencies  of  the  country,  may  be  studied 
from  this  viewpoint,  with  the  emphasis  placed  upon  the  real  func- 
tion which  a  transportation  agency  should  perform. 

I  wonder,  though  I  am  not  urging  the  government  own- 
ership of  the  railroads  as  the  best  way  out  of  the  present  diffi- 
culty, if  government  operation  of  the  railroads  is  as  bad  as  we 
are  led  to  believe.  The  statistics  show  that  the  number  of  people 
killed  and  injured  under  federal  control  is  very  much  less  than 
it  was  under  private  control.    That  is  a  gain.    We  are  led  to  be- 

[696] 


No.  4]  LABOR  AND  THE  DEMOCRATIC  CONTROL  185 

lieve  that  the  railroads,  under  government  operation,  have  been 
building  up  a  continuous  deficit.  That  point  is  much  emphasized ; 
but  beginning  in  July,  the  railroads  turned  the  corner,  as  soon  as 
any  one  had  a  right  to  expect  them  to.  They  paid  the  standard 
return,  operating  expenses,  and  everything  else.  In  August  the 
surplus  was  $12,000,000,  and  in  September  it  was  $19,000,000. 
Why  did  they  not  earn  a  surplus  in  the  previous  two  years  ?  Be- 
cause the  railroads  during  those  years  were  run  for  winning  the 
war,  and  Secretary  McAdoo  ran  his  trains  filled  with  goods  to  the 
seaboard,  and  ran  them  back  empty  in  order  to  get  more  goods. 
No  one  expected  any  agency  during  the  war  to  do  anything  else 
but  win  the  war.  Then  there  was  a  period  after  that  in  which 
everything  was  disorganized.  In  some  industries  there  were  sur- 
pluses, and  in  others  which  had  not  yet  begun  to  function  nor- 
mally there  was  a  continuing  deficit.  The  wage  roll  of  the  rail- 
roads was  piled  up  over  nine  hundred  million  dollars  under  gov- 
ernment operation.  Does  any  one  suppose  there  would  have  been 
no  increases  in  wages  under  private  control?  They  might  have 
been  less,  they  might  have  been  greater;  no  one  can  tell.  But  in 
connection  with  that  nine  hundred  million  which  we  hear  so  much 
about,  we  do  not  hear  that  there  were  145,000  employees  put  on 
for  the  purpose  of  speeding  up  war  production. 

Weeks  before  the  government  took  the  railroads  over,  there 
was  no  freight  moving,  as  I  recall  it.  Little,  if  anything,  moved 
in  New  England,  and  scarcely  anything  out  of  Pennsylvania  and 
the  West.  Within  three  weeks  after  the  government  took  them 
over,  something  happened  to  that  congestion.  Freight  again  began 
to  move,  and  it  has  been  moving  ever  since.  The  months  before 
the  war — I  am  a  commuter,  and  I  know — there  was  scarcely  a 
month,  sometimes  scarcely  a  week,  when  the  New  York  dailies 
did  not  carry  a  headline  of  a  smash  on  the  New  Haven.  There 
have  been  no  such  headlines  that  I  recall  since  the  government 
took  over  the  railroads.  The  other  day  I  read,  in  the  report  of 
the  regional  directors  who  are  actually  operating  the  railroads, 
of  the  economies  they  had  effected — not  waste.  We  assume  these 
men  have  been  wasters,  but  the  economies  due  merely  to  the 
better  utilization  of  the  physical  properties  totaled  over  two  hun- 
dred million  dollars,  and  that  did  not  include  the  ten  or  twelve 
million  from  reduction  in  salaries,  and  many,  many  millions  from 
other  things.  These  economies  may  or  may  not  have  been  wise. 
I  merely  mention  them  to  suggest  that  government  officials  do  not 

[697] 


186  RAILROAD  LEGISLATION  [Vol.  VIII 

consciously  and  intentionally,  apparently,  waste  money.  They  are 
not  wasters. 

Not  only  is  this  true,  but  the  railroads  have  been  out  of  politics, 
out  of  politics,  I  mean,  in  the  big  way.  Managers  were  able  to 
devote  themselves  to  railroading.  They  were  interested,  or  they 
should  have  been  interested,  in  making  transportation  efficient. 
And  a  large  number  of  men  found  a  new  satisfaction,  a  new  joy, 
in  operating  the  railroads  as  railroads  rather  than  as  financial, 
speculative,  monopoly  interests  that  existed  and  maintained  their 
power  through  continued  interference  with  our  political  life. 
In  addition,  all  shippers  had  a  fair  deal.  They  were  able  to  get 
a  hearing.  Independent  coal  operators  found  it  easy  to  secure 
cars.  The  same  is  true  of  shippers  of  food  products.  The  freight 
car  had  no  particular  home.  It  was  sent  anywhere.  The  same 
was  true  of  motive  power.  Freight  cars  were  loaded  more  nearly 
to  their  total  capacity  as  were  freight  and  passenger  trains.  Hun- 
dreds of  needless  competitive  passenger  trains  were  eliminated. 
The  best  roads  were  used  for  hauling  freight  while  other  roads 
were  used  for  hauling  empties.  Long,  circuitous  hauls  were 
eliminated.  Goods  were  routed  by  the  most  direct  way  possible. 
Terminals  were  consolidated.  They,  too,  were  used  efficiently. 
Thousands  of  passenger  offices  were  eliminated  as  were  hundreds 
of  needless  officials.  And  only  a  beginning  has  been  made  in 
economies  of  this  sort.  For  it  was  necessary  to  maintain  the 
integrity  of  the  private  lines  in  view  of  their  probable  return  to 
their  owners.  No  one  can  yet  estimate  the  economies  that  could 
ultimately  be  made  if  the  Government  definitely  merged  the 
250,000  miles  of  railway  into  a  single  operating  system. 

Coming  now  to  the  specific  details  of  the  Plumb  Plan,  I  find  I 
differ  from  the  suggestions  that  have  been  made  that  the  real 
question  is  a  question  involving  the  investor,  the  wage-earner  and 
the  public ;  that  we  should  seek  to  work  out  a  plan  which  satisfies 
these  three  interests  and  then  we  will  have  a  proper  transporta- 
tion system.  That,  I  believe,  is  impossible  under  private  control. 
Such  a  solution  but  continues  the  controversy.  The  main  func- 
tion of  a  railroad  is  transportation.  Its  purpose  is  to  serve  the 
entire  community.  The  interests  of  the  investor  and  the  wage- 
earner  are  incidental  to  this  end.  This  is  the  motive  of  railway 
operation  in  foreign  countries,  where  public  ownership  is  every- 
where accepted. 

Personally,  I  have  very  little  interest   in  any  transportation 

[698] 


No.  4]  LABOR  AND  THE  DEMOCRATIC  CONTROL  187 

adjustment  which  looks  upon  the  question  merely  as  a  continuing 
war  of  interests,  and  I  think  it  is  possible  to  work  out  a  railroad 
solution  and  a  transportation  solution  in  which  those  interests 
will  function  freely,  naturally,  collectively  together,  so  that 
transportation  by  rail  will  flow  as  naturally  and  freely  as  by  water, 
and  in  which  these  conflicting  groups  will  no  longer  conflict. 
Think  of  the  waste  involved  in  the  maintenance  of  forty-eight 
state  railroad  commissions,  the  Interstate  Commerce  Commission, 
courts,  railroad  attorneys  and  other  officials,  chambers  of  com- 
merce and  associations  fighting  rates.  The  government  itself, 
politics,  the  President,  our  whole  life,  is  interwoven  with  con- 
flict, when  it  might  be  interwoven  with  co-operative,  mutual  ef- 
fort. Until  transportation  in  this  country  becomes  a  co-opera- 
tive agency,  it  will  not  be  transportation  primarily — it  will  be 
something  else.  It  will  be  railroading,  but  it  will  not  be  a  func- 
tion like  the  circulatory  system  of  the  human  body,  as  it  should 
be,  to  serve  the  nation.  The  railroads  should  be  an  agency  for 
the  producers,  not  an  agency  of  capital.  They  should  be  an 
agency  of  the  state,  literally  what  they  are  legally  said  to  be, 
charged  with  a  public  use. 

While  the  Conference  on  Democratic  Control  is  not  committed 
to  any  plan,  I  personally  accept  the  principles,  the  underlying 
principles,  forgetting  the  details,  of  the  Plumb  Plan,  as  a  means, 
a  mechanism,  an  organization,  by  which  all  of  the  agencies  and 
factors  interested  in  transportation  will  work  and  function  to- 
gether to  service ;  not  to  profits  or  speculation,  not  to  strikes,  not 
to  conflict  in  which  our  railroad  commissions  will  be  involved. 
Conflicts  in  the  courts  will  be  minimized,  if  they  do  not  pass  away 
altogether. 

I  have  only  time  to  enumerate  the  other  elements  which  feature 
in  the  Plumb  Plan.  It  provides  for  a  board  of  directors  of  fifteen 
persons,  five  of  whom  are  appointed  by  the  President  to  represent 
the  public;  five  are  selected  by  the  operating  officials  and  five 
are  chosen  from  the  classified  employees.  There  are  to  be 
regional  organizations  representative  of  the  public,  of  the  officials 
and  the  employees.  For  the  Plumb  Plan  looks  to  the  decentraliza- 
tion of  railroad  administration  so  that  jt  will  come  in  close  contact 
with  shipper,  producer  and  consumer. 

The  earnings  of  the  railroads  are  to  be  distributed  as  follows : 

1.  Operating  expenses. 

2.  Interest  on  the  funded  debt. 

[699] 


18g  RAILROAD  LEGISLATION  [Vol.  VKf 

3.  A  sinking  fund  of  one  per  cent  which  will  retire  the  debt 
and  leave  the  railroads  in  the  possession  of  the  Government  in 
from  40  to  50  years. 

4.  Surplus  earnings,  if  such  exist,  will  be  divided  into  two 
parts :  one-half  to  the  Government  and  the  other  half  to  the  oper- 
ating force.  This  division  allots  to  the  public  one-half  of  the 
savings  due  to  improvements  in  the  arts  and  the  skill  of  the 
employees,  and  the  other  half  goes  to  the  labor  which  produces  it. 

Under  this  plan  the  railroads  would  be  operated  in  trust  for  all 
parties  in  interest  of  producers  and  consumers,  for  investors 
and  workers.  The  motive  of  operation  would  be  changed.  That 
is  all. 

Columbia  University  is,  perhaps,  as  efficiently  managed,  as  a 
trustee  corporation,  as  the  New  Haven  Railroad,  and  the  same 
thing  is  true  of  the  social  clubs  in  this  city.  It  is  true,  I  think, 
of  the  Panama  Canal;  it  is  true  of  hospitals.  This  country,  as 
some  foreigner  said  when  he  was  here  some  time  ago,  cannot  go 
wrong,  because  there  is  no  country  in  the  world  in  which  so  many 
people  are  engaged  in  service  activities,  in  which  the  people  are 
inspired  by  service  psychology  as  they  are  here.  Only  when  it 
comes  to  profit-making  corporations,  or  industry,  we  immediately 
draw  a  line  down  the  center  and  say,  "We  can  only  do  this  by 
letting  some  one,  some  group,  make  as  much  money  as  possible 
out  of  it." 

The  proposal  of  the  Plumb  Plan,  as  I  understand  it,  and  as  I 
have  heard  it  expounded  on  a  number  of  occasions,  and  as  it  is 
written  in  the  bill  proposed  to  Congress,  is  only  incidentally  a 
measure  for  enabling  the  workers  to  get  a  higher  wage.  Person- 
ally, I  am  perfectly  willing  to  see  that  feature  of  the  plan  washed 
away,  except  for  this  reason:  It  is  a  symbol,  a  current  symbol, 
a  token — if  you  will — of  partnership.  It  is  a  thing  that  suggests 
to  men,  "Here  is  a  means  of- improving  your  condition  by  more 
effort,  by  more  conscience,  by  using  all  of  your  energies."  I  like 
it  for  that  reason. 

But  an  increase  of  wages  is  not  the  essential  feature  of  the 
Plumb  Plan.  The  essential  desire  of  the  advocates  of  the  Plumb 
Plan  is  to  propose  a  measure  for  the  operation  of  all  the  trans- 
portation agencies  of  the  country;  not  railroads  alone,  but  boats 
upon  the  lakes  and  the  rivers ;  not  these  alone,  but  trucks  which 
will  go  out  to  the  manufacturer  and  will  come  to  the  ultimate  con- 
signee, giving  a  service  that  will  radiate  out  to  the  farms  as  the 

[700] 


No.  4]  LABOR  AND  THE  DEMOCRATIC  CONTROL  189 

telephone  or  the  postoffice  does,  and  eliminate  all  waste  between 
producer  and  consumer. 

The  Plumb  Plan  proposes  a  trustee  corporation  just  like  any 
other  corporation ;  it  proposes  that  the  government  shall  buy  the 
railroads  by  the  issuance  of  its  securities  against  private  securi- 
ties. Now  I  have  heard  the  suggestion  that  this  is  an  unthinkable 
thing  because  of  the  burden,  the  mortgage  burden,  on  the  Amer- 
ican people  from  the  interest  on  those  bonds.  The  American 
people  now  pay  interest  on  these  bonds,  and  will  continue  to  do 
so,  whether  the  railroads  are  privately  owned  or  publicly  owned. 
We  escape  nothing,  unless  we  escape  the  interest  rates  in  mak- 
ing the  change,  and  we  do  probably  make  a  substantial  saving 
oi  between  4y2  per  cent  and  6l/2  per  cent  interest  on  twenty 
billion  dollars,  that  is  $400,000,000  saved  at  the  start  by  this 
conversion. 

The  Plumb  Plan  is  not  a  means  of  turning  the  railroads  over 
to  the  workers  to  exploit ;  it  is  not  a  mere  shifting  of  control  from 
capital  to  labor.  Rather,  the  Plumb  Plan  fits  in  with  all  of  the 
traditions  of  America.  It  fits  in  with  three  centuries  of  expansion 
and  development.  It  harmonizes  with  all  of  our  experience,  as 
it  does  with  the  foundations  of  our  life.  For  during  these  gen- 
erations men  worked  for  themselves.  They  owned  their  own 
tools.  They  were  impelled  by  hope.  They  used  their  mind  as 
well  as  their  hand.  They  felt  that  their  contributions  redounded 
in  part  at  least  to  their  own  advantage.  They  were  only  inci- 
dental wage-earners.  They  were  really  partners,  full  partners, 
in  production.  And  the  Plumb  Plan  looks  to  the  awakening  of 
the  same  kind  of  hope  among  the  workers ;  it  looks  to  dignifying 
them,  to  elevating  their  self-respect,  to  freeing  them  and  calling 
forth  their  imagination.  This  is  one  way  to  stimulate  produc- 
tiveness. This  is  also  one  way  to  end  strikes.  For  men  do  not 
strike  against  themselves.  Partners  do  not  strike  against  one 
another.  And  with  2,000,000  men  organized,  as  I  believe  they 
could  be  organized,  to  think  of  transportation  as  a  collective  en- 
terprise dependent  upon  the  good  will  of  the  community  as  well 
as  on  the  contributions  of  the  employees,  the  frictions  and  con- 
flicts which  now  exist  would  tend  to  pass  away  while  the  motive 
of  operation  would  be  service  to  the  community.  For  it  would 
be  through  the  best  and  cheapest  service  that  the  earnings  of  the 
railroads  and  the  earnings  of  the  men  would  be  most  rapidly 
increased.     Irrespective  of  other  considerations  the  freeing  of 

[701] 


190  RAILROAD  LEGISLATION  [Vol.  VIII 

2,000,000  men  from  the  wage  relationship  and  the  adding  of  this 
great  army  to  the  groups  of  men  who  have  some  economic  stake 
in  their  work  would  be  a  gain  of  immeasurable  value  to  the 
democracy  of  the  country. 


[702] 


SOME  PRACTICAL  ASPECTS  OF  THE  RAILROAD 

PROBLEM 

IVY  L.  LEE 
Formerly  Assistant  to  the  President,   Pennsylvania  Railroad 

HAVING  had  the  privilege  last  night  of  sitting  next  to  Mr. 
Doak  at  the  dinner,  and  having  listened  to  him  this 
morning,  I  can  only  say  that  I  wish  our  labor  men  in 
this  country  could  continue  indefinitely  to  be  led  by  a  man  of  the 
conservatism  of  view  which  he  shows.  But  I  would  like  to  say 
this,  with  reference  to  some  of  his  history:  Mr.  Doak  repudi- 
ates the  thought  that  the  passage  of  the  Adamson  Law  was  due 
to  the  railroad  employees.  I  shall  not  attempt  to  characterize 
what  happened,  but  I  recall  the  events,  about  like  this: 

A  deadlock  had  arisen  in  New  York,  out  of  which  a  strike 
seemed  probable  within  a  very  few  hours,  and  then  both  sides 
were  summoned  to  Washington  by  the  President.  Another 
deadlock  resulted.  The  railroad  managers  proposed  arbitration 
which  was  declined  by  the  men ;  a  strike  order  was  sent  out,  ef- 
fective, I  think,  the  following  Monday  morning.  The  President 
thereupon  appeared  before  Congress  and  stated  to  Congress  that 
unless  an  act  was  passed  embodying  substantially  the  demands 
of  the  men  for  an  eight-hour  day,  a  strike  would  take  place  within 
a  few  hours. 

Dropping  all  other  business,  while  representatives  of  the 
Brotherhoods  sat  in  the  gallery  and  looked  on,  Congress,  in  almost 
continuous  session,  was  able  to  get  through  this  law,  and  have  it 
passed  and  signed  by  the  President,  I  think  on  Saturday  after- 
noon, when  the  strike  was  to  take  place  on  Monday  morning. 
Immediately  after  the  law  was  signed,  the  strike  order  was  with- 
drawn. 

I  have  the  most  profound  respect  for  Mr.  Howe's  sweetness  of 
spirit  and  idealism  of  hope.  I  have  heard  him  speak  on  other  oc- 
casions and  wish  sincerely  that  I  could  share  the  idealism  with 
which  he  looks  out  upon  humanity. 

To  think  of  that  Elysian  system  under  which  a  well  equipped 
railroad,  sympathetically  conducted,  would  be  at  the  service  of 
every  farmer,  in  every  remote  part  of  the  country,  with  a  special 
train  ready  to  carry  his  products  immediately  to  the  market  in 

[703] 


192 


RAILROAD  LEGISLATION  [Vol.  VHI 


which  he  would  obtain  the  highest  prices  for  his  goods,— is  a 
beautiful  picture!  And  then  when  you  think  that  this  great 
service  is  going  to  be  at  your  disposal  somewhat  like  an  elevator 
in  an  office  building,  free  of  use  to  all,  without  thought  of  profit 
to  anybody,  a  sympathetic  instrument  placed  at  the  disposal  of 
the  farmer  or  the  merchant,  it  is  beautiful.  But  let  us  apply  a 
little  practical  thought  to  it. 

Suppose  you  have  a  railroad  system  organized  for  "service" 
and  not  for  profit.  Who  is  to  determine  what  and  where  the  de- 
velopment of  that  railroad  shall  be?  Admittedly  we  are  a  long 
way  from  having  a  complete  railroad  system  in  this  country. 
Are  we  going  to  have  our  railroads  developed  by  the  log-rolling 
methods  of  Congress,  under  which  Congressmen  from  remote 
regions  of  Oregon  will  bargain  with  Congressmen  from  the 
country  districts  of  Maine,  to  have  railroad  development  take 
place  in  their  respective  districts?  Or  are  we  going  to  do  the 
practical,  sensible,  business  thing,  and  that  is  to  say  to  the  money 
markets  of  the  world:  "The  field  of  American  development  is 
open,  and  if  you  will  risk  your  money  we  will  give  you  a  chance 
to  realize  a  legitimate  profit  upon  it."  You  apply  then  the  acid 
test  of  results  to  the  judgment  of  the  men  who  suggest  solutions 
of  your  problems.  It  seems  to  me  that  is  the  practical  way  we  " 
must  look  at  the  matter. 

But  Mr.  Howe  says  it  would  be  a  glorious  thing,  and  he  be- 
lieves in  America  enough  to  believe  that  if  the  railroad  employees 
were  simply  working  for  service  that  we  would  have  a  great 
railroad  system.  Now  I  have  never,  in  all  of  this  talk  about 
service,  heard  anybody  suggest  that  the  railroad  operatives  should 
deny  themselves  anything  while  providing  this  service. 

We  have  heard  so  much  about  the  profit  to  the  capitalist,  the 
profit  to  the  security  holder,  the  profit  to  the  one  who  takes  his 
savings  out  of  the  bank  and  risks  them  in  railroad  enterprises; 
the  profit  to  the  one  who,  if  the  enterprise  is  a  failure,  loses 
everything,  but  who,  if  the  enterprise  is  a  success,  must  get  un- 
limited profit.  But  we  hear  very  little  about  the  railroad  operative 
who,  under  such  a  system  as  is  suggested  by  Mr.  Howe,  and  as 
provided  for  in  the  Plumb  Plan,  would  have  opportunity  to  get 
unusual  or  undue  profit  in  the  form  of  wages  or  salaries. 

I  want  to  use  terms  now  that  I  do  not  mean  to  be  offensive; 
but  I  do  think  it  is  important,  when  we  object  to  the  capitalist 
profiteer,  that  we  shall  have  no  less  objection  to  the  labor  prof- 

[704] 


No.  4]     PRACTICAL  ASPECTS  OF  THE  RAILROAD  PROBLEM  193 

iteer.  And  a  man  who  gets  fifty  per  cent  more  for  a  day's  wages 
than  his  service  really  entitles  him  to,  is  just  as  much  a  profiteer 
as  the  capitalist  who  gets  fifty  per  cent  more  than  he  is  legiti- 
mately entitled  to. 

I  won't  attempt  to  discuss  in  detail  Mr.  Howe's  figures  with 
reference  to  the  Government  operation  of  railroads.  I  would 
simply  like  to  refer  to  one  item.  He  called  attention  to  the  fact 
that  we  had  145,000  new  railroad  employees,  and  that  that  ac- 
counted for  a  large  part  of  the  wage  increase.  Mr.  Besler  al- 
luded to  the  fact  that  the  wage  bill  of  the  railroads  increased 
from  about  three  million  dollars  a  day  in  1916  to  seven  million 
to-day.  That  is  an  increase  of  133  1/3  per  cent.  An  increase  of 
145,000  employees  is  an  increase  of  eight  per  cent,  so  you  have 
had  an  increase  of  eight  per  cent  in  your  employees,  and  an  in- 
crease of  133  1/3  per  cent  in  your  wage  bill.  Those  figures,  of 
course,  speak  for  themselves. 

I  will  refer  to  only  two  other  points.  Mr.  Besler  stated,  and 
stated  very  wisely,  that  the  real  demand  of  railroad  labor  is  the 
certainty  of  fixed  wages,  and  I  think  in  that  statement  he  em- 
phasizes two  points — not  alone  that  the  wages  shall  be  right,  but 
that  there  shall  be  certainty  of  those  wages.  To  me  the  great 
fundamental  evil  in  our  whole  system  of  wages  to-day — if  you 
will  allow  me  to  say  so — is  the  absence  of  the  certainty. 

To-day  everybody  is  employed,  but  we  know  perfectly  well — 
and  no  one  would  agree  with  this  more  readily  than  Mr.  Besler — 
that  we  have  to  look  forward  to  a  time  when  railroad  traffic  will 
fall  off,  when  locomotives  will  be  stored,  when  cars  will  be  stored, 
when  there  will  not  be  the  work  for  the  men  to  do,  and  when  the 
men  will  have  to  be  laid  off.  Now,  that  is  the  fundamental  evil 
of  our  system,  and  the  great  desideratum  at  which  we  should  aim 
is  some  kind  of  plan  whereby  in  profitable,  good  times  we  shall 
lay  aside  a  certain  surplus  out  of  our  earnings,  which  will  make 
certain  that  the  men  will  be  employed  in  bad  times. 

Just  one  other  point :  I  heard  last  night,  one  of  the  speakers — 
the  last  speaker,  Mr.  Shea, — say  that  his  fundamental  objection 
to  the  anti-strike  clauses  of  the  Cummins  Bill — and  I  want  to  say 
I  agree  with  the  reasoning  of  Mr.  Doak  on  anti-strike  legislation 
— and  the  objection  of  so  many  people,  was  that  they  had  word 
that  there  was  a  conspiracy  planned  on  the  part  of  the  railroad 
managers  of  the  country,  when  the  private  management  was  re- 
stored, to  reduce  railroad  wages.. 

[70S] 


194  RAILROAD  LEGISLATION  [Vol.  VIII 

It  is  unfortunate  that  statements  of  that  kind  should  be 
made.  Any  such  allegation  is,  of  course,  preposterous. 
The  facts  are,  as  Mr.  Besler  stated,  that  in  the  course 
of  events  prices  will  come  down,  there  will  be  less  work  to  do, 
and  wages  will  inevitably  come  down;  but  that  there  is  a  con- 
spiracy planned  is  a  statement  that  ought  not  to  need  charac- 
terization. I  have  the  pleasure  of  rather  intimate  knowledge  of 
the  operation  of  the  railroads  in  this  country,  and  intimate 
acquaintance  with  many  of  the  men  who  make  their  policies,  and 
I  know,  of  personal  knowledge,  that  such  an  idea  as  that  is  as 
foreign  to  their  minds  as  it  is  foreign  to  your  minds  that  this 
building  will  catch  fire. 

Let  us  discuss  these  questions  in  the  light  of  reason,  intelli- 
gence and  conservatism,  such  as  Mr.  Besler  and  Mr.  Doak 
showed,  and  not  see  red  all  the  time,  as  some  people  are  inclined 
to  do. 


[706] 


DISCRIMINATIONS 

WILLIAM  CHURCH  OSBORN, 
Lawyer,  New  York 

I  AM  not  appearing  before  you  today  in  my  usual  Satur- 
day character  of  a  farmer,  although  as  such  I  might  pass 
my  compliments  and  kind  regards  to  those  who  have  so 
greatly  increased  rates  upon  my  products.  Nor  am  I  coming  be- 
fore you  in  the  character  of  a  consumer,  although  as  you  know, 
each  and  every  one  of  you,  we  might  have  a  word  or  two  to  say 
to  these  railroad  men  concerning  the  prices  that  we  have  to  pay 
for  what  we  eat  and  what  we  wear.  I  am  coming  before  you,  as 
the  program  puts  me  down,  as  a  lawyer ;  simply  a  plain  lawyer 
who  wants  to  analyze  the  facts  of  the  railroad  situation  a  little  for 
your  benefit.  The  statements  are  not  what  I  think  ought  to  be, 
but  what  I  think  is  and  will  be. 

For  the  last  thirty  years  the  process  has  been  coming  on  with 
increasing  speed,  of  changing  the  railroad  business  from  a  pri- 
vate industry  to  a  public  service  system,  and  with  all  due  re- 
spect to  Mr.  Lee,  I  think  that  so  far  as  capital  is  concerned,  the 
process  has  become  complete.  The  right  to  manage  the  railroads 
and  the  right  to  make  a  profit  out  of  a  railroad  investment  have 
substantially  been  taken  away  from  capital. 

In  my  judgment,  the  temper  of  the  people  of  this  country, 
as  shown  by  the  attitude  of  Congress  and  of  the  Interstate  Com- 
merce Commission  toward  rates  and  by  the  repeated  elections  in 
the  matter  of  street  car  fares,  is  that  they  do  not  propose  to  per- 
mit capital  to  make  a  profit  out  of  a  public  service  enterprise. 

If  no  profit  be  allowed,  then  railroad  capital  in  the  United 
States  will  have  to  be  hired  by  the  public,  hereafter,  at  such  a 
rate  of  interest,  with  such  security  as  the  private  investor  will  be 
determined  to  demand.  What  may  be  done  with  the  existing 
capital?  What  sacrifices  may  be  made  of  it?  That  in  my  judg- 
ment, will  depend  very  largely  upon  the  point  of  view  which  the 
public  will  take  of  how  they  are  to  obtain  the  capital  to  be  sub- 
sequently needed. 

We  must,  therefore,  discriminate  capital  out  of  the  game.  I 
do  not  mean  to  say  there  is  not  going  to  be  a  lot  of  money  made 

[707] 


196 


RAILROAD  LEGISLATION  [Vol.  VIII 


out  of  the  ups  and  downs  of  stocks,  but  from  the  standpoint  of 
putting  your  money  into  a  new  railroad  enterprise  and  expect- 
ing to  make  a  profit  out  of  it,  take  the  advice  of  an  aged  and  some- 
what weary  citizen  on  that  branch  of  the  subject.    Don't. 

Now,  assuming  that  capital  is  down  if  not  out.  How  about 
labor?  Is  labor  in  a  public  service  industry  on  the  same  basis 
as  labor  in  other  industries  ?  I  am  not  sure ;  perhaps  it  is.  There 
is  this  great  difference,  however,  between  a  railroad  employee 
or  a  postal  clerk  or  a  policeman  and  the  employee  in  a  productive 
industry.  One  owes  a  service,  the  other  produces  a  profit.  Strictly 
speaking,  I  cannot  see  that  there  is  any  such  thing  as  "  profit " 
in  a  public  service  industry  where  the  rates  are  fixed  by  law.  So- 
called  profits  are  only  savings.  Hence  the  employees  can  receive 
for  their  services  only  what  the  public  allows  them  in  rates. 
Such  employees  can  hardly  be  considered  as  partners. 

When  the  Adamson  Law  was  passed,  it  was  in  effect  a  request 
by  the  railroad  employees,  "  Make  me  as  one  of  thine  hired  ser- 
vants." They  accepted  the  Government  as  the  arbiter  of  their 
destinies,  as  the  fixer  of  their  compensation,  as  the  determiner  of 
their  position  in  the  labor  world,  a  very  marked  and  fundamental 
change  in  the  attitude  of  labor.  Now,  you  see  the  railroad  busi- 
ness is  different  from  a  business  that  produces.  The  railroad 
business  has  really,  I  think — as  a  public  service  business — come 
down  to  hired  capital,  and  has  got  to  come  down  to  hired  labor, 
for  the  reason  that  the  prices  fixed  are  fixed  by  the  public. 
It  seems  to  me  there  is  a  distinct  discrimination  there  between 
a  public  service  business  and  any  other  kind  of  business.  I  am 
not  very  clear  about  it,  but  that  is  rather  the  view  that  has  come 
to  my  mind.  If  that  is  so,  are  there  not  some  serious  implica- 
tions with  regard  to  the  Plumb  Plan,  with  regard  to  the  right  of 
the  employees  in  a  public  service  corporation  to  strike,  with  the 
relation  of  those  employeesJto  other  branches  of  industry  in  the 
United  States  ?  I  rather  think  there  are.  I  rather  think  that  the 
great  public,  the  98  per  cent  public,  has  interests  more  important 
than  those  of  the  2  per  cent  railroad  crowd. 

I  will  tell  you  in  brief,  what  I  think  of  the  situation,  because 
I  have  only  a  moment  to  spare.  I  am  inclined  to  think  that  the 
railroad  employees  should  be  compensated  somewhat  more  highly 
than  employees  doing  corresponding  work  in  other  branches  of 
life.  Although  they  have  the  advantage  of  permanency,  and  all 
but  about  10  per  cent  have  the  advantage  of  living  at  or  near 

[708] 


No.  4]  DISCRIMINATIONS  197 

their  own  homes — I  mean  all  except  the  trainmen,  who  constitute 
about  10  per  cent  of  railroad  labor — and  although  the  railroad 
service,  believe  me,  is  the  most  interesting  and  fascinating  service 
in  the  world,  putting  aside  all  of  those  considerations  I  still  feel 
that  railroad  employees  should  have  a  somewhat  higher  com- 
pensation than  other  employees,  because  of  the  great  importance 
to  the  public  of  maintaining  that  service  upon  the  highest  stan- 
dards. Justice,  accurate  and  complete  justice,  should  be  done  to 
railroad  employees,  but  injustice  should  not  be  done  to  other 
classes  of  the  working  people  of  the  country.  And  that  would  be 
an  injustice  if  they  were  placed  upon  an  unbalanced  scale,  so  that 
one  class  rose  way  above  the  others. 

I  think,  consequently,  that  the  adjustment  of  railroad  wages 
is  likely  ultimately  to  take  the  form  of  a  determination  by  a  na- 
tional board  of  a  proper  scale  of  railroad  wages,  taking  into  ac- 
count not  only  the  requests  of  the  railroad  men,  but  the  average 
scale  of  wages  in  other  industries  throughout  the  United  States. 
And  that  board,  which  I  think  is  likely  ultimately  to  be  created, 
will  require  the  wisdom  of  Solomon,  the  patience  of  Job,  and  the 
meekness  of  Moses  to  carry  it  through  its  task.  How  else  are  we 
to  do  it? 

Mr.  Shea  last  night,  and  Mr.  Doak  this  morning,  were  very  de- 
termined that  the  right  to  strike  should  be  retained  within  their 
control.  They  were  equally  assuring  that  it  would  never  be  used. 
How  else  then,  unless  we  are  going  to  have  the  old  fashioned 
system  of  contest,  are  we  going  to  determine — we  consumers, 
lawyers  and  farmers — how  are  we  going  to  get  adequate  rail- 
road pay  adequately  and  properly  determined  unless  it  goes  be- 
fore some  board — intelligent,  wise  and  long-suffering? 

Those  few  remarks  are  my  contribution,  if  they  can  be  called 
such,  to  the  subject;  a  subject  which  is  more  likely  to  generate 
heat  than  light,  and  as  I  do  not  feel  very  warm  about  it  this 
morning,  I  hope  possibly  I  may  have  thrown  just  a  slender  gleam 
of  light  upon  a  dark  situation. 


[709] 


THE   IMPORTANCE   OF   THE   PUBLIC   INTEREST 

EDWIN  R.  A.  SELIGMAN 
McVickar  Professor  of  Political  Economy,  Columbia  University 

THE  topic  of  the  final  session  is  "The  Railroads  and  the 
Public."  I  shall  detain  you  only  a  few  moments  by  a 
word  or  two  of  introduction.  This  is  the  culminating 
aspect  of  our  entire  deliberations,  and  it  is  naturally  so  because 
whatever  may  be  our  particular  interests,  those  of  the  public 
are  the  transcendent  ones.  In  fact,  if  only  we  appreciated  the 
situation  thoroughly  it  would  be  seen  that  the  ostensible  inter- 
ests of  each  of  the  three  classes  with  which  we  have  been  dealing 
are  really  public  in  character,  or  as  is  said,  affected  with  a  public 
interest. 

Let  us  take,  for  instance,  the  relation  of  the  railroads  and  the 
shipper  which  was  discussed  yesterday.  The  shipper  is  indeed 
interested  in  securing  satisfactory  rates,  but  as  was  made  clear, 
those  satisfactory  rates  do  not  necessarily  mean  the  lowest  pos- 
sible rates.  A  rate  which  is  so  low  as  to  spell  inefficiency  is 
uneconomical  and  will  soon  react  upon  the  public  interests  and 
ultimately  upon  the  interests  of  the  shipper  himself.  It  is  for 
that  reason  that  we  welcome  for  the  first  time  in  the  discussion  of 
the  railroad  problem  the  advocacy  of  an  adequate  rate,  not  neces- 
sarily of  a  minimum  rate,  on  the  part  of  the  shippers  themselves. 
The  second  session  was  devoted  to  "The  Railroads  and  the 
Investor."  I  prefer  that  term  to  that  of  "The  Railroads  and 
Their  Owners."  Last  night,  in  the  enthusiasm  of  their  exuber- 
ant exposition,  some  of  the  gentlemen  spoke  of  the  owners  of 
the  railroads,  meaning  the  private  owners.  Of  course  that  is  no 
longer  the  present  point  of  view.  The  time  when  a  man  owned 
a  railroad  as  he  owned  his  shoe  factory  has  gone,  never  to  re- 
turn. In  the  largest  sense  of>the  term  it  is  the  public  that  really 
owns  the  railroads,  even  though  for  purposes  of  convenience  and 
desirability,  it  may  turn  over  the  administration,  and  perhaps 
even  the  control,  of  these  arteries  of  commerce,  to  private  in- 
dividuals. Instead  of  speaking  of  private  owners  we  should  rather 
speak  of  the  trustees  of  the  public.  It  is  for  that  reason  that  I 
welcome  the  choice  of  the  term  "The  Railroads  and  the  Inves- 
tor." The  investor  is  indeed  entitled  to  a  fair  return  on  his  in- 
vestment, but  that  is  a  very  different  thing  from  saying  that  the 
private  owner  of  a  railway  has  indefeasible  and  exclusive  rights 

[710] 


No.  4]  THE  IMPORTANCE  OF  THE  PUBLIC  INTEREST  199 

to  their  operation.  So  that  here  also  you  see  that  the  real  inter- 
ests, even  from  the  point  of  view  of  the  investor,  are  the  public 
interests  rather  than  the  purely  private  interests. 

Finally  this  morning  we  had  the  pleasure  of  listening  to  the 
discussion  of  the  relation  of  the  railroads  and  labor.  From  one 
point  of  view  that  also  represented  a  class  interest,  a  selfish  inter- 
est. We  shall  never  arrive  at  a  solution  of  the  railway  problem 
if  we  look  at  it  only  from  the  point  of  view  of  the  class  or  the 
selfish  interest.  The  labor  interest,  from  a  higher  point  of  view, 
is  also  a  public  interest.  In  what  can  the  public  be  more  interested 
than  in  such  a  satisfactory  labor  situation  as  to  spell  not  only 
economy  and  efficiency  in  the  operation,  but  also  such  contentment 
in  the  great  mass  of  the  workers  as  will  redound  to  the  public  ad- 
vantage in  the  broadest  sense  of  the  term  ?  But  on  the  other  hand 
if  better  wages  and  shorter  hours  are  deemed  more  important  by 
the  workers  than  continuous  and  satisfactory  service,  not  only 
will  the  public  suffer,  but  in  the  end  also  the  workers. 

It  is,  therefore,  for  these  reasons,  that  I  say  we  shall  never 
reach  a  solution  of  the  problem  that  now  confronts  us  in  a  more 
aggravated  form  than  ever  before  in  our  history,  if  we  continue 
to  regard  it  from  the  separate  angles  of  each  selfish  and  contend- 
ing interest.  We  find  indeed  a  homage  of  lip  service  rendered 
to  the  higher  idea  by  most  of  the  contending  parties.  The  in- 
vestors say  a  great  deal  about  their  interest  in  the  labor  problem ; 
but  if  they  have  to  choose  between  adequate  returns  on  their  in- 
vestments and  low  wages,  there  is  not  much  doubt  as  to  what 
they  would  choose.  And  labor  does  precisely  the  same  thing. 
In  the  admirable  address  of  Mr.  Shea  last  night  we  heard  some 
entirely  sincere  sentiments  about  the  need  of  safeguarding  the 
property  rights  of  the  investor.  But,  if  it  came  to  a  showdown 
between  a  return  to  the  capital  invested  and  a  satisfactory  wage 
for  the  worker,  there  is  little  doubt  as  to  what  the  decision 
would  be. 

What  I  want  to  point  out  in  conclusion  is  that  whatever  our 
final  answer  may  be — and  I  think  this  afternoon's  deliberations 
will  help  us  to  come  a  little  closer  to  a  final  decision,  because 
this  afternoon  we  are  looking  at  the  question,  not  from  the  point 
of  view  of  any  one  of  these  three  contending  parties,  the  shipper, 
the  investor  or  the  laborer,  but  from  the  angle  of  the  real  social- 
economic  aspects  of  the  situation  as  a  whole  or  the  wider  interests 
of  the  community — we  shall  see  that  in  final  analysis  it  is  always 

[711] 


200  RAILROAD  LEGISLATION  [Vol.  VIII 

the  public  that  has  to  pay.  If  the  shipper  is  charged  a  high 
rate,  the  charges  are,  in  the  long  run,  added  to  the  price 
of  the  commodities  in  the  hands  of  the  final  consumer.  If  the 
investor  does  not  secure  an  adequate  return  on  his  investment, 
it  will  necessarily  have  to  be  supplemented  by  some  form  of  pub- 
lic aid.  If  the  capital  is  not  forthcoming,  the  railroads  will  not 
be  built.  We  shall  need,  in  addition  to  the  twenty  billions  of 
capital  that  we  now  have,  at  least  another  twenty  or  thirty  bil- 
lions, before  our  railway  system  can  be  declared  complete.  If 
this  is  to  be  provided  by  private  individuals,  and  if  the  investor 
does  not  get  an  adequate  return  from  the  rates  and  fares,  it  will 
have  to  come  from  the  public,  either  in  the  shape  of  a  guarantee 
of  interest  or  dividends,  or  in  the  shape  of  a  definite  subsidy  to 
make  up  the  deficit.  In  either  case,  it  is  the  taxpayer,  the  public, 
that  will  ultimately  pay. 

So  again  with  the  laborer.  I  think  that  the  working  men  have 
made  one  essential  and  new  contribution  to  the  topic.  We  are 
all  pleading  for  an  automatic  adjustment  of  the  rate  situation  so 
that  the  investor  will  not  be  prejudiced.  We  have  not  yet  worked 
out  a  plan,  under  private  ownership  and  management,  of  an 
automatic  adjustment  of  the  wage  question.  The  fears  which, 
as  we  have  learned,  permeate  the  railway  laborers  today  are  all 
reducible  to  the  lack  of  any  such  system  of  automatic  adjust- 
ment. But  if  we  have  such  an  automatic  adjustment,  and  if 
wages  continue  to  rise  with  the  cost  of  living,  here  again 
it  is  the  public  which  must  stand  the  burden.  The  investor  cer- 
tainly cannot  do  it.  The  public  has  got  to  do  it,  either  through 
increased  railway  rates  or  through  taxation  to  meet  the  deficit. 
And  if  the  Government  should  finally  be  compelled  to  manage 
the  railways,  with  a  consequent  probability  that  the  profits  of 
private  management  would  be  dissipated  through  an  in- 
crease of  ordinary  expenses,  we  sJkould  be  confronted  by  the  same 
situation  that  we  find  in  other  forms  of  Government  enterprise. 
We  must  choose  between  a  higher  rate  to  the  shipper,  which 
ultimately  means  increased  prices  to  the  consumer,  or  higher 
levies  on  the  taxpayer.  Accordingly,  it  is  quite  clear  that  after 
all  it  is  the  public  interest  which  is  the  paramount  interest  and 
that  all  the  contending  and  conflicting  demands  of  supposedly 
antagonistic  classes  must  be  reduced  to  the  higher  synthesis 
of  the  public  interest.  From  this  point  of  view  I  think  we  shall 
all  look  forward  to  hearing  the  contributions  of  the  day. 

[712] 


THE  RAILROADS  AND  THE  PUBLIC 

FRANK  H.  SISSON 
Vice-President  of  the  Guaranty  Trust  Company  of  New  York 

ONE  of  the  chief  limitations  of  our  particular  form  of 
democracy  is  that  the  course  of  legislation  is  too  often 
determined  by  special  interests  at  the  expense  of  the 
general  interest.  An  aggressive  and  well  organized  support  of 
or  opposition  to  proposed  legislation,  even  though  entirely  selfish 
in  purpose,  in  too  many  instances  determines  legislative  action  in 
matters  in  which  the  public  interest  receives  scant  consideration. 
One  of  the  wisest  things  Theodore  Roosevelt  ever  said  was  that 
"the  public  won't  take  its  own  part."  In  no  field  of  public  interest 
has  this  been  more  apparent  than  in  that  of  transportation.  For 
a  quarter  of  a  century  the  railroad  business  in  the  United  States 
has  been  a  battle-ground  for  conflicting  special  interests.  In- 
vestor, shipper,  politician,  and  laborer  have  contended  in  turn  for 
the  privilege  of  exploiting  the  railroads  for  their  own  advantage, 
without  regard  to  public  considerations.  Each  in  turn  has  won 
victories  at  the  expense  of  the  public,  which  the  public  has  suf- 
fered much  too  patiently. 

With  the  whole  railroad  question  laid  upon  the  table  for  fresh 
determination,  it  would  seem  that  the  time  is  opportune  for  the 
public  voice  to  be  heard  and  the  public  interest  established.  It 
might  be  assumed  that  this  course  of  action  would  be  taken  by  a 
Congress  elected  to  represent  the  whole  people,  but  the  experience 
of  the  past  does  not  warrant  this  assumption  in  the  process  of 
either  legislation  or  regulation.  The  marvel  of  the  situation  is 
that,  in  spite  of  the  conflict  which  has  been  waged  over  the  rail- 
roads, they  have  continued  to  serve  their  public  so  well,  at  the 
lowest  cost,  with  the  lowest  capitalization,  and  the  greatest  effi- 
ciency of  any  railroads  in  the  world. 

Public  Stake  Paramount  Consideration 
I  feel  warranted  in  stating  that  there  is  nothing  whatever  in 
our  own  experience  with  public  ownership  in  this  country,  or  in 
the  experience  of  other  countries,  to  justify  an  argument  that  it 
would  secure  better  results,  so  I  return  to  the  conclusion  that  the 
alternative   is   private   ownership   under   public   regulation,   but 

[713] 


202  RAILROAD  LEGISLATION  [Vol.  VIII 

under  a  public  regulation  conducted  primarily  and  as  completely 
as  possible  in  the  broad  public  interest.  To  obtain  that  result, 
it  is  essential  that  there  may  be  a  larger  appreciation  of  the 
meaning  of  transportation  in  the  life  of  our  people  and  of  the 
high  importance  of  its  fair  and  constructive  treatment. 

The  greed  of  either  capital  or  labor,  the  ambitions  of  politicians 
seeking  an  issue,  the  selfishness  of  shippers  fighting  to  save  dimes 
and  losing  dollars,  the  prejudices  of  theorists — the  mistakes  of 
the  past  and  the  animosities  of  the  present — should  not  be  allowed 
to  interfere  with  the  solution  of  the  problem.  The  public  stake 
in  this  situation  is  greater  than  that  of  any  or  all  of  the  parties 
directly  concerned  and  must  be  protected.  Furthermore,  the 
very  protection  of  the  public's  interest  implies  justice  and  fair 
dealing  to  all,  which  cannot  be  assured  by  any  other  policy. 

I  think  it  may  be  fairly  argued  that  the  future  prosperity  of 
the  people  of  the  United  States  is  dependent  upon  adequate  and 
efficient  transportation.  Without  proper  distribution  both  pro- 
ducer and  consumer  must  suffer.  Adequate  transportation  can- 
not be  obtained  without  credit,  credit  cannot  be  secured  without 
earning  power,  earning  power  will  not  be  sufficient  without  fair 
rates  and  just  regulation. 

Or,  to  approach  the  proposition  from  the  standpoint  of  labor, 
efficient  transportation  is  not  possible  without  competent  service, 
and  competent  service  is  impossible  without  fair  wages  and 
working  conditions.  Fair  wages  cannot  be  paid  unless  warranted 
by  earning  power,  and  earning  power  would  be  inadequate  with- 
out fair  rates. 

Again,  to  approach  the  problem  from  the  standpoint  of  the 
shipper,  there  will  not  be  adequate  or  efficient  transportation  to 
bear  his  goods  to  market  unless  rates  are  high  enough  to  com- 
mand sufficient  credit  to  invite  capital,  and  pay  sufficient  wages 
to  attract  labor. 

From  every  standpoint,  we  revert  to  the  question  of  rates  and, 
as  the  determination  of  that  question  lies  in  the  hands  of  the 
public,  through  its  duly  authorized  representatives,  the  correct 
solution  of  the  problem  depends  upon  the  public  understanding  of 
it.  The  chief  danger  of  the  situation  is  that  the  public,  through 
failure  to  understand  and  appreciate  the  importance  of  the  prob- 
lem, may  permit  a  solution,  in  whole  or  in  part  opposed  to  the 
general  welfare,  to  be  worked  out  under  the  pressure  of  selfish 
interests. 

[714] 


No.  4]  THE  RAILROADS  AND  THE  PUBLIC  203 

Roads  Vital  to  Domestic  and  Foreign  Commerce 

Our  railroads  should  be  taken  out  of  the  field  of  exploitation 
into  that  of  sound  economics.  They  present  a  business  problem 
to  a  business  people,  and  should  be  accorded  a  solution  conceived 
and  worked  out  in  the  same  spirit  as  our  banking  system. 

To-day  this  problem  assumes  even  a  greater  importance  than 
in  the  past,  because  of  world  conditions.  The  markets  of  the 
world  lie  open  to  American  commerce  and  industry.  If  we  can 
produce  and  distribute  our  surplus  products  economically  so  as 
to  meet  the  competition  of  the  world,  we  can  continue  American 
prosperity. 

No  factor  enters  into  this  opportunity  of  greater  importance 
than  inland  transportation.  The  railroads  of  this  country  must 
be  able  to  furnish  the  transportation  which  will  assure  the  pro- 
duction and  movement  of  American  goods,  if  we  are  to  be  factors 
in  the  world's  trade.  Such  efficiency  will  demand  many  millions 
of  new  capital,  scientific  regulation  and  operation,  and  the  elimi- 
nation of  the  waste  and  the  friction  which  have  been  forced  upon 
the  railroads  by  governmental  interference. 

New  capital  can  be  attracted  only  upon  the  basis  of  adequate 
earnings  and  fair  regulation,  assuring  a  return  which  will  make 
railroad  investments  and  operation  attractive.  Neither  brains 
nor  money  nor  labor  can  be  commandeered  into  such  service  or 
obtained  without  fair  compensation.  The  railroads  must  have 
more  partners  and  fewer  creditors,  more  friends  and  fewer  class 
exploiters. 

Unless  the  United  States  safeguards  its  position  by  sound 
business  practices,  Europe  liberated  from  war  and  quickened 
by  its  necessities,  eventually  will  again  command  international 
commerce. 

A  non-political  banking  system  has  met  our  great  test.  Our 
next  great  step  in  economic  progress  should  be  toward  a  non- 
political  railroad  system.  Only  upon  such  a  basis  can  we  hope 
to  maintain  our  prosperity  through  our  ability  to  market  our 
products.  I  would  reemphasize  this  point.  Every  farmer,  every 
manufacturer,  every  laborer,  every  business  man  in  the  country  is 
vitally  concerned  in  efficient  transportation  as  the  first  necessity 
of  commerce. 

Most  Vital  of  All  Factors 

But  if  no  other  factor  were  considered  by  the  public,  the 
relationship  of  the  railroad  problem  to  the  cost  of  living  should 

[715] 


204  RAILROAD  LEGISLATION  [Vol.  VIII 

arouse  the  keenest  general  interest  and  force  an  expeditious,  sat- 
isfactory solution  of  the  problem.  Unfortunately,  however,  there 
seems  to  be  an  insufficient  understanding  of  this  vital  factor  by 
the  majority  of  our  people.  The  railroad  brotherhoods,  it  is 
true,  have  recently  attempted  to  call  the  public's  attention  to  the 
connection,  but  they  have  distorted  the  facts  to  serve  their  own 
selfish  purposes. 

In  opposing  the  Esch  bill,  the  brotherhoods  allege  that  it  will 
validate  eight  billion  dollars  of  "watered"  railway  capital  and 
compel  the  companies  to  pay  dividends  on  "shadow  dollars." 
The  spokesmen  for  three  brotherhoods  contend  that  the  increase 
in  rates  which  will  be  necessary  to  pay  these  dividends  will  "take 
one  billion  dollars  away  from  the  shippers  and  add  from  three 
to  five  billions  of  dollars  to  what  the  consumers  pay  for  the 
necessaries  of  life." 

It  is  significant  to  note  that  the  leader  of  one  of  the  four 
brotherhoods  declined  to  sign  the  statement  in  which  this  absurd 
assertion  was  made,  frankly  stating,  according  to  report,  that 
he  did  not  believe  the  cost  of  living  would  be  increased  by  such 
an  amount. 

As  to  the  allegation  regarding  "watered"  stock,  it  is  a  well 
known  fact  that  since  1907  the  railways  have  kept  their  accounts 
in  the  manner  prescribed  by  the  Interstate  Commerce  Commis- 
sion, and  that  in  the  twelve  years  which  have  elapsed  there  has 
not  been  and  could  not  have  been  any  so-called  "watering"  of 
stock.  If  there  had  been  eight  to  ten  billion  dollars  of  "watering" 
prior  to  1907  it  would  have  been  necessary  to  build  the  230,000 
miles  of  railroads  constructed  up  to  that  time  at  an  average  cost 
of  only  $22,000  a  mile,  which  was  not  possible — and  the  leaders 
of  the  brotherhoods  know  that  as  well  as  anyone  else.  The  real 
fact  is  that  on  any  fair  basis  of  valuation  there  is  not  a  dollar  of 
"water"  in  railroad  capital  as  a  whole. 

We  must  bear  in  mind  that  a  very  large  part  of  the  savings 
of  the  people  of  this  country  is  invested  in  railroads,  directly 
through  ownership  of  stocks  and  bonds  and  indirectly  through 
the  investments  of  savings  banks  and  insurance  companies.  Rail- 
road credit,  in  fact,  is  at  the  foundation  of  all  American  credit; 
and  railroad  credit  can  be  maintained  only  by  allowing  the  rail- 
roads living  rates  out  of  which  a  fair  return  can  be  paid  on  the 
investment.  At  present  the  return  on  property  investment  de- 
rived from  earnings  of  the  controlled  roads  bids  fair  to  be  only 

[716] 


No.  4]  THE  RAILROADS  AND  THE  PUBLIC  205 

about  three  per  cent,  which  is  not  only  far  from  fair  but  actually 
a  starvation  rate. 

It  is  worth  noting,  in  this  connection,  that  only  a  half  dozen 
railway  stocks  now  sell  at  par,  and  it  has  not  been  possible  to 
issue  a  single  share  of  new  stock  this  year  and  only  a  very  little 
in  the  last  five  years,  although  industrial  stocks  have  been  issued 
to  the  extent  of  more  than  a  billion  dollars.  Railway  shares 
which  still  pay  seven  per  cent  dividends  are  at  a  discount  of  from 
ten  to  twenty  per  cent.  And  under  such  conditions  railways  can 
finance  themselves  only  by  borrowing,  and  then  only  under  ex- 
ceedingly disadvantageous  conditions. 

Effect  of  Rates  on  Living  Costs 

There  need  be  no  fear  of  materially  increasing  the  cost  of 
living  by  allowing  railroad  capital  a  living  wage,  for  increase  in 
freight  rates  have  but  a  slight  effect  on  the  general  cost  of  living, 
as  compared  with  other  factors. 

This  is  demonstrated,  to  cite  only  one  specific  example,  by  the 
fact  that  the  item  of  transportation,  computed  from  the  shipping 
of  a  steer  on  a  ranch  to  the  selling  of  a  pair  of  shoes  in  a  retail 
store,  enters  into  the  cost  of  shoes  only  to  the  extent  of  twenty- 
five  cents  a  pair.  So,  railway  rates  cannot  be  held  responsible 
for  the  increase  in  the  selling  price  of  shoes  which  formerly 
retailed  at  $5  and  now  cost  $12. 

The  cost  of  living  began  its  sharpest  increase  late  in  1915. 
Taking  September,  1915,  as  parity  for  the  wholesale  price  of  all 
commodities,  it  is  found  that  in  July,  1917,  it  had  reached  187. 
No  material  increase  in  the  average  freight  rate  of  all  com- 
modities took  place  until  August  of  1917.  Thus  the  advance 
from  parity  to  187  in  the  wholesale  price  of  all  commodities 
had  taken  place  with  freight  rates  practically  unchanged.  Freight 
rates  advanced  in  August,  1917,  and  from  that  time  on  the  in- 
crease in  commodity  prices  was  very  gradual,  reaching  only  197 
in  February,  1919,  an  increase  of  only  12  points  over  the  price 
in  July,  1917.  This  would  indicate  that  the  cost  of  living  gained 
its  greatest  headway  without  any  increase  in  rates,  and  that  this 
headway  was  not  maintained  at  the  same  rate  when  freight 
charges  became  heavier. 

The  average  commodity  value  per  ton  of  freight  carried  by 
the  railroads  in  1919  has  been  $119,  as  compared  with  $56  in 
1914.    The  average  freight  charge  per  ton  has  been  $2.80  this 

[717] 


206  RAILROAD  LEGISLATION  [Vol.  VHI 

year,  as  against  $2  in  1914.  The  percentage  of  the  carrying 
charge  to  the  value  of  a  ton  of  freight  has  been  2.4  per  cent,  as 
contrasted  with  3.6  per  cent  in  1914.  But  the  increase  in  the  cost 
of  the  average  ton  of  freight  over  that  of  1914  has  been  $63, 
while  the  increase  in  the  freight  charges  per  ton  has  been  only 
80  cents,  a  mere  pittance — and  the  relation  of  freight  increase  to 
cost  increase  has  been  only  1.3  per  cent. 

To  sum  up,  out  of  the  average  increase  of  $63  in  the  cost  of  a 
ton  of  freight  in  the  five-year  period  of  1914  to  1919  only  80 
cents  was  caused  by  increased  freight  charges. 

These  statistics  unquestionably  prove  the  negligible  influence 
which  transportation  costs  exert  on  commodity  prices,  and  they 
certainly  sustain  the  contention  that  a  fair  increase  in  freight 
rates  would  not  materially  increase  the  cost  of  living. 

On  the  other  hand,  if  adequate  rates  are  not  granted  and  the 
railroads  are  brought  to  the  verge  of  bankruptcy,  with  the  im- 
paired service  which  such  a  plight  would  necessarily  entail,  the 
cost  of  living  would  inevitably  mount  still  higher,  because  in- 
creased production — the  only  way  prevailing  prices  can  be  re- 
duced— would  be  impossible,  due  to  decreased  distribution  facili- 
ties for  raw  materials ;  and  even  if  possible,  by  virtue  of  some 
miracle,  it  would  be  in  vain  owing  to  the  lack  of  sufficient  means 
for  distributing  additional  products. 

Government  Control  a  Heavy  Financial  Burden 
There  is  growing  agitation  for  reduced  taxation  as  a  means  to 
lower  the  cost  of  living,  but  it  is  curious  that  in  this  connection 
little  thought,  apparently,  has  been  given  by  the  public  to  one  of 
the  important  causes  of  heavy  taxation,  Government  control  of 
the  railroads.  While  the  net  profits  derived  by  the  Government 
from  operation  of  the  railroads  in  September  were  $3,390,000, 
the  Eastern  carriers  earned  in  {he  first  eight  months  of  this  year 
only  $114,000,000,  as  compared  with  a  standard  return,  guar- 
anteed by  the  Government,  of  $231,000,000.  In  other  words, 
the  Government  must  pay  the  difference,  which  amounts  to 
$117,000,000.  The  earnings  of  the  Southern  roads,  during  the 
same  period  totaled  $50,000,000,  as  compared  with  a  standard  of 
$89,000,000,  making  a  deficit  of  $39,000,000  for  the  Govern- 
ment. The  earnings  of  the  Western  roads  in  the  first  eight 
months  of  1919  amounted  to  $163,000,000,  or  $79,000,000  less 
than  the  guaranteed  return.    The  grand  total  of  the  deficit  of  the 

[718] 


No.  4]  THE  RAILROADS  AND  THE  PUBLIC  207 

three  groups  from  the  first  of  the  year  until  the  end  of  August 
was  $235,000,000,  which  must  come  out  of  the  taxpayers'  pockets. 
The  total  operating  deficit  of  the  roads  under  Government  con- 
trol at  the  end  of  the  calendar  year  is  conservatively  estimated  as 
likely  to  be  not  less  than  $300,000,000,  while  the  total  deficit  for 
the  two  years  of  Government  operation  promises  to  be  not  less 
than  $500,000,000. 

In  this  connection  it  is  interesting  to  note  that  there  has  been 
an  increase  of  11  per  cent  in  the  number  of  employees  of  the 
roads  under  Government  control,  and  an  average  increase  in  unit 
of  compensation  of  53  per  cent. 

These  facts  and  figures  have  a  far  greater  significance  than 
merely  to  show  that  Government  control  of  the  roads  has  been 
expensive,  when  due  consideration  is  given  to  their  bearing  on 
the  future  of  the  roads. 

Organized  labor  has  served  notice  that  it  will  not  consent  to 
a  reduction  of  prevailing  wages.  The  Anderson  amendment  to 
the  Esch  bill  was  the  first  attempt  to  enforce  that  decree  through 
legislative  channels,  for  that  amendment,  if  enacted  into  the 
railroad  law  which  Congress  is  now  framing,  would  serve  to 
perpetuate  the  high  wage  scale  put  into  effect  on  the  railroads  as 
a  war  measure  to  meet  the  high  cost  of  living. 

The  amendment  provides  for  the  continuation  of  the  Railway 
Adjustment  Boards,  created  by  Director  General  McAdoo,  and 
provides  that  the  wages  which  have  been  fixed  by  them  shall 
stand.  Furthermore,  it  provides  that  these  cases  in  which  the 
existing  high  wages  were  fixed  shall  not  be  reopened  except  with 
considerable  difficulty  and  red-tape  procedure  favorable  to  the 
brotherhoods.  The  possibilities  of  these  provisions  are  so  obvious 
as  to  need  no  comment. 

But  it  is  absolutely  certain  that  the  railroads  cannot  maintain 
the  present  wage  scale  when  they  are  returned  to  private  man- 
agement and  the  United  States  Treasury — or,  in  other  words, 
the  money  of  the  tax-payers — is  no  longer  available,  unless  the 
roads  are  permitted  to  earn  rates  commensurate  with  the  service 
rendered. 

Adequate  Maintenance  Necessary 

Furthermore,  the  carriers  must  be  permitted  to  earn  enough  to 
maintain  themselves  in  proper  physical  condition.  During  the 
period  of  Government  control  they  have  been  under-maintained, 
largely  as  a  result  of  the  war.    In  the  pre-war  period  normal  rail 

[719] 


208  RAILROAD  LEGISLATION  [Vol.  VIII 

purchases  by  the  railroad  companies  consumed  3,000,000  tons  of 
steel,  and  including  steel  track  material,  railroad  consumption 
of  steel  was  not  far  from  4,000,000  tons  annually.  But  to  catch 
up  with  their  maintenance  requirements,  it  is  estimated,  the  roads 
need  5,000,000  tons  of  steel  for  rails  alone. 

It  should  be  borne  in  mind,  also,  that  orders  for  new  equipment 
mean  more  business  for  scores  of  industries.  So,  as  the  railroads 
prosper  business  generally  prospers,  and,  consequently,  no  busi- 
ness man  can  allow  the  railroads  to  be  injured  permanently  with- 
out also  endangering  his  own  interests. 

Hundreds  of  Millions  of  New  Capital  Needed. 

It  is  plain  that  in  the  next  few  years  hundreds  of  millions  of 
dollars  will  have  to  be  invested  in  the  railroads.  One  authority 
recently  asserted  that  at  least  six  billion  dollars  of  new  capital 
must  be  invested  in  railroad  facilities  within  the  next  three  years, 
if  the  roads  are  to  be  able  to  handle  the  country's  commerce  sat- 
isfactorily. Most  of  the  capital  must  come  from  the  savings  of 
the  people,  which  can  be  attracted  to  such  investment  only  on  the 
basis  of  public  confidence  in  the  stability  of  railway  earnings. 

We  should  not  forget,  in  this  connection,  that  the  railroads  will 
have  to  bid  for  those  millions  in  keen  competition  with  many  other 
borrowers  who  will  be  able  and  eager  to  pay  attractive  interest 
rates.  All  the  world  urgently  needs  American  capital,  and  as 
has  wisely  been  observed,  "investors  need  not,  and  will  not,  be 
mendicants  for  the  privilege  of  serving  the  public."  In  other 
words,  the  credit  of  the  railroads  must  be  restored  through  en- 
larged earning  powers  sufficient  to  enable  railway  securities  to 
take  rank  with  the  best  in  the  American  market. 

The  paramount  question  then  is:  Will  the  American  people 
deny  to  the  transportation  industry  the  free  operation  of  those 
basic  principles  which  have  developed  all  American  industry, 
and  upon  which  future  American  prosperity  depends? 

Service  Based  on  Reward 
Efficient  service  can  be  secured  only  by  the  stimulus  of  ade- 
quate reward.     This  is  true  in  the  railroad  field,  as  elsewhere. 
Neither  capital  nor  labor  will  support  any  other  programme. 

Any  governmental  attempt  to  own  or  operate  so  vast  a  busi- 
ness as  transportation  must  assuredly  fail  through  the  absence  of 
selfish  interest  as  an  incentive  to  achievement,  the  lack  of  stand- 
ards of  efficiency,  or  suffering  through  failure  to  achieve  them, 

[720] 


No.  4]  THE  RAILROADS  AND  THE  PUBLIC  209 

assured  political  interference,  delay,  waste,  vacillation,  and  ham- 
pering limitations. 

Political  direction  of  transportation  could  result  only  in  dis- 
aster. The  public  interest  demands  a  transportation  system  with 
a  credit  which  will  command  the  funds  of  investors  and  not  of 
taxpayers,  an  operating  efficiency  stimulated  by  the  hope  of  re- 
ward, and  a  construction  programme  which  will  develop  the 
resources  of  the  country. 

That  these  results  can  best  be  secured  under  private  ownership 
and  private  management,  subject  to  unified  and  sane  public 
regulation,  is  the  only  conclusion  justified  by  experience.  No 
theory  can  disprove  the  record  of  facts. 

The  roads  must  be  saved  from  these  dangers  which  threaten 
them  and  saved  immediately.  Further  procrastination  threatens 
the  welfare  of  the  whole  country. 

The  Challenge  of  Socialism 

There  is  another  menace  to  both  the  railroads  and  the  country 
to  which  the  American  public  must  also  awake,  and  that  is  the 
proposal  of  the  railroad  brotherhoods  to  nationalize  the  railroads 
for  their  particular  benefit.  In  that  proposal,  socialism,  for  the 
first  time  in  our  history,  seriously  throws  down  the  gage  of  battle 
nationally  and  demands  a  trial  at  arms.  This  challenge,  in  itself 
of  far-reaching  importance  in  the  attempt  it  makes  to  control 
the  great  service  of  transportation,  is  of  much  greater  significance 
in  the  definite  threat  that  success  in  this  field  will  be  followed  by 
efforts  to  secure  the  nationalization  of  all  industry,  or,  in  other 
words,  a  complete  socialistic  state. 

The  time  has  come  for  the  citizens  of  this  country,  its  business 
men  and  its  laborers,  its  property  owners  and  its  workers,  seri- 
ously to  face  the  issue  thus  presented,  if  they  are  not  to  see  their 
interests  ruined  and  their  property  confiscated  by  economic  ex- 
periments and  social  hysteria  which  seem  to  fill  the  air.  Not 
since  the  free  silver  fallacy  arose  to  threaten  American  business 
and  progress  has  so  dangerous  a  programme  threatened  our 
prosperity. 

This  bold  effort  to  take  possession  of  one  of  the  nation's  basic 
and  most  vital  industries  for  the  benefit  of  a  single  class,  and 
to  the  assured  detriment  of  all  others,  frankly  discloses  the  wide 
spread  of  socialistic  thought  in  this  country  and  the  danger  to 
American  institutions  which  it  implies. 

[721] 


210 


RAILROAD  LEGISLATION  [Vol.  VIII 


It  is  inconceivable  that,  if  the  American  people  as  a  whole 
really  understood  the  elements  in  the  problem  presented,  there 
could  be  any  doubt  about  their  solving  it.  The  most  ordinary 
common  sense,  awakened  self-interest,  and  knowledge  of  human 
nature  and  human  experience  should  quickly  repudiate  the  fal- 
lacies inherent  in  the  proposed  Plumb  plan.  The  danger  is  that 
public  thought  will  not  be  quickened  to  the  situation,  and,  through 
lack  of  understanding  and  organization,  legislation  may  be  forced 
through  Congress  by  means  of  organized  political  pressure, 
backed  by  abundant  funds  for  propaganda  and  lobbying,  which 
will  work  irreparable  mischief  before  the  public  is  aroused  to  the 

peril. 

Interests  of  All  Classes  Involved 

Every  element  in  the  body  politic  has  a  stake  in  this  situation. 
The  man  with  money  and  the  man  without  it  are  equally  con- 
cerned, and  the  great  middle  class,  which  constitutes  the  ma- 
jority, has  its  all  involved.  Even  the  railroad  worker,  himself, 
while  he  would  undoubtedly  profit  temporarily  by  control  of  these 
properties,  would  in  the  long  run  be  injured  because  of  the  as- 
sured failure  of  the  plan  and  the  economic  chaos  which  would 
follow  the  working  out  of  this  programme. 

Wall  Street  As  Middleman 

The  brotherhood  leaders  seem  to  rest  under  the  general  false 
impression  that  Wall  Street  owns  the  railroads  and  furnishes 
the  money  for  them.  This  is  true  only  to  the  extent  that  Wall 
Street  acts  as  the  middleman  in  this  situation.  The  railroads  are 
owned,  not  by  Wall  Street,  but  by  the  millions  of  stockholders, 
bondholders,  savings  bank  depositors,  life  insurance  policyhold- 
ers, etc.,  to  whom  railroad  securities  have  been  distributed.  Wall 
Street  does  not  fix  the  rate  for  money ;  that  is  fixed  by  economic 
conditions,  and  security  offerings  are  based  upon  the  price  at 
which  the  public  will  absorb  them — and  that  law  would  operate 
just  as  surely  if  the  Government  were  undertaking  the  financial 
burden. 

By  what  process  could  the  holders  of  railroad  securities  based 
upon  mortgages  to-day  be  compelled  to  exchange  these  holdings 
or  suffer  their  confiscation?  Indeed,  what  right  would  the 
trustees  of  fiduciary  institutions  have  to  permit  such  sacrifices? 
It  is  absolutely  certain  that  the  Government  would  not  have  either 
the  power  or  the  right  to  work  out  any  such  financial  programme. 

[722] 


No.  4]  THE  RAILROADS  AND  THE  PUBLIC  211 

Class  Rule  and  Class  Profiteering 
Stripped  of  all  its  fine  phrases  and  socialistic  rhetoric,  the 
Plumb  plan  is  simply  a  scheme  for  class  rule  and  class  profiteer- 
ing. It  provides  for  government  of  transportation  of,  by,  and 
for  the  railroad  brotherhoods.  There  is  no  modest  restraint 
of  profit-sharing  in  the  plan,  because  it  turns  these  properties 
over  to  the  employees  on  a  practically  perpetual  lease  under  a 
scheme  of  control  in  which  they  fix  the  return  to  themselves 
through  their  power  over  wages,  and  under  this  lease  they  accept 
no  risk  of  the  business  whatever.  That  is  borne  entirely  by  the 
Government,  or  stated  more  fairly,  by  the  public.  There  is  no 
provision  for  securing  a  fair  rental  for  the  property,  no.  effective 
control  of  rates  by  public  authority,  and  the  control  over  wages 
lies  in  the  hands  of  a  board  that  the  employees  would  directly 
control  by  a  two-thirds  majority,  and  completely  control  by  reason 
of  political  influence. 

What  the  consequence  may  be  of  this  class  control  over  trans- 
portation is  foreshadowed  by  the  already  liberal  increases  which 
labor  has  secured  through  Government  control  of  railroads,  and 
the  large  additional  advances  labor  is  now  seeking.  Since  1915 
railroad  labor  has  averaged  a  wage  increase  of  more  than  85  per 
cent;  more  than  $1,000,000,000  has  been  added  to  the  wage  roll 
under  Government  direction,  and  demands  now  lie  before  the 
Government  authorities  for  increases  aggregating  $800,000,000 
more.  Only  a  few  days  ago  the  Director  General  of  the  Railroads 
submitted  to  representatives  of  the  four  railway  brotherhoods  an 
increased  wage  scale  amounting  approximately  to  $3,000,000  a 
month. 

From  the  broad  standpoint  of  public  interest  it  seems  so  obvious 
as  to  be  beyond  argument  that  the  control  of  this  great  service  of 
transportation  should  remain  in  the  hands  of  the  public  and  not 
be  delegated  to  any  selfish  class.  That  mistakes  have  been  made 
under  previous  systems  of  control,  or  lack  of  control,  constitutes 
no  proper  argument  for  attempting  this  radical  departure  from 
the  assured  bounds  of  experience. 

Only  Way  Solution  Can  Be  Worked  Out 

The  railroad  situation  to-day  presents  many  real  problems,  but 

these  problems  cannot  be  solved  properly  in  the  interests  of  any 

class  or  under  threat  and  force.     Only  patient  and  fair-minded 

study,  from  the   viewpoint   solely   of    the   general   interest,   can 

[723] 


212  RAILROAD  LEGISLATION  [Vol.  VIII 

bring  a  proper  solution.  The  securing  of  that  solution  is  just 
as  vital  to  the  railroad  brotherhoods  and  to  labor  generally  as 
to  any  other  interest  involved,  for  after  all  they  are  all  citizens 
of  the  United  States,  and  only  as  the  United  States  prospers  as  a 
whole  can  they  long  prosper.  Continued  prosperity  can  be  based 
only  upon  sound  economic  and  political  principles,  and  any  ven- 
ture into  other  fields  must  bring  disaster  to  all  concerned. 

The  struggle  is  on  between  democracy  and  socialism.  In  spite 
of  its  shortcomings,  we  have  developed  in  this  country  a  system 
under  which  its  people  have  enjoyed  the  greatest  prosperity  of 
any  people  in  the  world's  history.  To-day  all  the  world  turns  to 
us  for  help,  and  if  we  jeopardize  not  only  our  own  powers  of 
service  but  also  our  own  national  future  by  departing  so  radically 
from  the  system  which  has  made  us  great  we  shall  be  recreant 
to  both  our  duty  and  our  opportunity.  Individual  freedom  and 
the  incentive  to  success,  which  have  built  this  country,  cannot 
be  forsaken  without  pulling  down  over  our  own  heads  the  struc- 
ture we  have  so  proudly  reared.  It  seems  unthinkable  that  such  a 
possibility  could  even  be  discussed,  and  yet  here  it  faces  us,  not 
only  a  possibility,  but  a  probability,  unless  the  intelligence  of  the 
country  is  aroused  to  meet  it. 

On  this  question  of  Government  ownership  of  railroads  we 
stand  to-day  in  the  first  line  trenches  for  the  protection  of  the 
private  ownership  of  all  property.  If  this  position  is  lost  the 
whole  line  will  be  seriously  threatened.  Men  who  believe  in 
American  institutions,  in  property  rights,  in  orderly  government, 
must  line  up  in  opposition  to  this  attack,  or  live  to  regret  the  day 
of  their  unpreparedness. 

The  railroad  problem  is  the  immediate  and  intimate  problem  of 
all  of  us  as  citizens,  and  taxpayers,  consumers  and  producers.  If 
we  are  not  able  to  solve  this  fundamental  economic  question  fairly 
and  sanely  in  the  public  interest  through  our  duly  accredited 
representatives,  we  shall  have  loosened  the  very  cornerstone  of 
our  whole  economic  structure  and  must  be  prepared  to  see  it 
tumble  about  us  carrying  disaster  to  special  interest  and  general 
interest  alike.  Democracy  faces  the  test.  Can  it  function  effi- 
ciently in  such  a  crisis  or  must  it  learn  the  lesson  through  years 
of  experiment  and  disaster?    That  is  the  question  of  the  hour. 


[724] 


THE  OBJECTIONS  TO  AN  IMMEDIATE  RESUMPTION 
OF  PRIVATE  OPERATION 

GEORGE  FOSTER  PEABODY 
Banker,  New  York 

WE  are  all  indebted  to  the  Chairman  for  putting  so  clearly 
before  us  the  foundation  of  the  discussion  this  after- 
noon, which  is  really  the  foundation  of  the  whole  study 
we  have  before  us,  the  interest  of  the  public  as  being  paramount, 
as  being  fundamental  to  the  whole  question.  I  wish  it  were  pos- 
sible that  his  very  succinct  expression  of  that  might  be  put  before 
the  minds  of  the  whole  public  because,  as  Mr.  Sisson  has  pointed 
out,  the  public  is  indicating  very  slight  interest  in  this,  the  most 
important  domestic  issue  that  has  ever  come  before  the  country. 

My  excuse  for  speaking  on  this  subject,  apart  from  my  interest 
in  public  affairs  for  many  years,  is  that  for  more  than  a  third  of  a 
century  I  have  been  actively  engaged  as  a  banker  and  railroad 
official,  in  the  construction  of  railroads  and  the  operation  of  rail- 
roads and  the  observance  of  the  conditions  in  the  relation  of  rail- 
roads to  the  public  practically,  and  with  reference  to  the  influence 
in  politics,  of  railroad  corporations  which,  as  regulation  began 
to  develop  more  and  more,  were  compelled  to  be  in  politics  and 
compelled  to  be  in  politics  in  the  most  harmful  and  disastrous  way 
possible,  because  they  necessarily  worked  more  or  less  under- 
ground. They  worked  to  influence  the  election  or  defeat  of  this 
man  or  that  man.  We  cannot  imagine  any  more  harmful  way 
of  having  the  railroads  participate  in  politics  than  the  way  of 
participation  through  regulation  of  the  private  corporations  by 
the  government.  The  railroads  have  long  been  operated  for  profit 
with  public  service  as  a  secondary  consideration.  We  all  recall, 
as  was  suggested  to  us  last  evening  at  the  dinner,  the  well-known 
phrase  of  a  very  prominent  man  with  reference  to  the  public's 
relations  to  the  railroads  just  after  he  had  sold  thirty  million 
dollars  worth  of  railroad  stocks  to  some  people  in  Great  Britain. 

I  have  observed  in  my  very  considerable  relations  with  rail- 
roads in  every  section  of  this  country,  Mexico  and  Canada,  that 
while  they  do  not  say  so  publicly,  it  is  almost  of  necessity  the  fact 
that  the  operating  managers  and  officials  of  railroads  feel  that 


._.::_ 


-'t&etinmc  he 


--. 


■ 


-    ;::r- 


:i±    ~ 


—  -       " 


216  RAILROAD  LEGISLATION  [Vol.  VHI 

We  have  had  suggested  to  us  by  Mr.  Sisson's  excellent  paper 
the  dangers  that  there  will  be  if  we  have  no  increase  of  rates,  and 
if  you  observed  the  detail  with  which  he  suggested  these 
dangers  you  would  realize  that  it  is  a  very  complicated  proposition 
that  he  suggests.  Professor  Johnson  has  pointed  out  to  us  in  a 
very  illuminating  and  educative  way  the  desirability  of  having 
another  board  of  transportation  to  help  regulation.  Regulation 
of  a  private  corporation  operated  for  profit  means  friction.  I 
have  been  told  by  friends  in  charge  of  great  railroad  systems  that 
in  the  last  few  years,  one-third,  sometimes  one-half  of  their  time 
was  taken  up  with  attention  to  the  orders  from  the  Interstate 
Commerce  Commission  and  from  the  various  Commissions  in 
the  States  in  which  their  roads  operated,  in  order  to  try  to  avoid 
friction,  serious  friction,  financial  friction  and  every  other  kind. 

Mr.  Sisson  has  pointed  out  to  you  the  difficulty  of  railroads 
getting  credit.  I  think  Mr.  William  Church  Osborn,  this  morn- 
ing, was  absolutely  right  in  saying  that  the  public  has  reached  the 
final  point  of  view  as  regards  the  use  of  capital — it  had  no  more 
money  to  lend  the  railroads.  That  is  true.  You  have  heard  that 
six  billion  of  dollars  of  new  capital  would  be  required  for  the 
maintenance  and  extension  of  the  railroads.  I  think  that  is  a 
much  smaller  amount  than  should  be  properly  spent.  It  cannot 
be  raised  by  any  conceivable  proper  development  of  government 
relation  to  privately  owned  roads,  at  any  reasonable  figure.  I 
am  confident  of  that.  What  is  needed  by  every  interest  is  time 
to  study  and  develop  all  the  facts  as  to  where  this  railroad  prob- 
lem is  coming  out,  as  to  what  will  happen  under  certain  condi- 
tions, and  then  have  a  public  sentiment  created  that  will  give  us 
a  rightly-informed  Congress,  that  will  present  a  bill  that  will  be 
discussed  far  and  wide. 

There  are  two  bills.  The  Esch  Bill  has  passed  the  House.  The 
Cummins  Bill  will  pass  the  S€hate  with  such  amendments  as  we 
do  not  now  know  of.  No  one  familiar  with  legislation,  no  one 
familiar  with  such  affairs,  has  the  remotest  idea  that  either  the 
present  Esch  Bill  or  the  Cummins  Bill  will  be  the  bill  finally 
passed.  They  will  both  go  to  a  Conference  Committee  where  in 
secret,  as  so  much  of  the  important  legislation  of  the  United 
States  has  been  devised,  a  new  bill  in  very  many  respects,  will 
come  out  and  there  will  be  but  a  short  time  for  the  public  to  get 
any  idea  of  its  real  thought.  People  will  have  no  opportunity 
to  have  a  carefully  considered  and  carefully  reasoned  opinion 

[728] 


No.  4]  OBJECTIONS  TO  AN  IMMEDIATE  RESUMPTION  217 

as  to  how  that  bill  will  relate  itself  to  roads  in  Illinois  and  to  roads 
in  New  England  and  to  roads  on  the  Pacific  and  to  roads  in  the 
South.  These  regions  are  all  different  in  their  conditions.  The 
cotton  business  is  a  seasonal  business ;  the  grain  business  is  a 
seasonal  business ;  the  manufacturing  is  more  or  less  of  a  seasonal 
business  in  New  England. 

The  President  then  has  the  problem  put  before  him.  Without 
any  clear  public  sentiment,  without  any  assurance  on  his  part  as 
to  how  the  public  will  take  it,  the  President  is  called  upon  to  veto 
or  sign  such  a  bill  within  a  few  weeks.  It  is  the  most  amazing 
temerity,  the  lack  of  interest  on  the  part  of  the  public  and  the 
lack  of  really  thorough  effort  and  determination  on  the  part  of  our 
great  leaders  in  finance  and  railroad  management,  that  they 
should  not  now  ask  for  time  in  which  carefully  to  develop  the 
facts  as  to  those  details  which  are  of  such  vital  importance  to  the 
public. 

You  perhaps  have  realized  already  that  I  am  not  in  favor  of  a 
return  to  private  ownership.  After  some  fifteen  years  of  active 
relation  to  railroad  management  in  very  considerable  detail,  as 
I  say,  I  reached  the  conclusion  twenty  years  ago  that  it  was  not 
possible  without  too  serious  friction  to  have  a  government-regu- 
lated railroad  system  privately  owned  and  with  profit  making 
related  to  it.  So  I  believe  we  shall  not  go  forward  with  the  real 
progress  in  democracy  until  our  transportation  system  is  oper- 
ated without  any  profit  to  labor  or  to  capital,  but  is  operated  so 
that  the  man  who  has  industry,  ingenuity  and  power  and  initiative 
to  develop  and  to  increase  the  production  of  wealth,  shall  be  as- 
sured that  this  wealth,  which  he  is  to  send  here  and  there  in  this 
country  and  the  world,  shall  be  transported  properly  and  quickly 
and  at  the  cheapest  possible  rate  without  any  question  of  prefer- 
ence to  any  of  his  rivals. 


[720] 


RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY 

AND  SOCIAL  JUSTICE. 

ALBERT  M.  TODD 
President  Public  Ownership  League  of  America 

WHAT  is  "democracy,"  and  what  is  "social  justice?"  Be- 
fore specifically  defining  these  terms,  let  me  say  at 
once :  "Democracy  is  the  greatest  thing  in  the  world." 
It  was  that  for  which  America  was  willing  to  enter  the  greatest 
war  of  history,  not  only  in  her  own  behalf,  but  in  behalf  of  the 
peoples  of  the  entire  world.  The  President  proclaimed  in  all  his 
official  statements,  in  all  his  speeches,  and  in  all  public  documents, 
before  and  during  the  war,  that  we  were  called  to  arms  to  "make 
the  world  safe  for  democracy/' 

We  believed  then,  as  we  believe  now,  that  every  citizen  is 
rightfully  summoned  to  defend  democracy  even  to  making  "the 
great  last  sacrifice."  How  nobly  and  unselfishly  our  citizens  re- 
sponded to  this  call  is  attested  by  the  countless  graves  of  our 
heroic  dead  who  lie  in  the  soil  of  a  sister  republic  over  the  seas, 
and  nearby,  "where  the  poppies  bloom  in  Flanders  fields." 
America's  sacrifices  for  democracy  are  equally  attested  by  the 
countless  mothers  and  fathers  whose  sons  will  never  again  cross 
the  threshold  to  cheer  and  support  their  old  age;  by  the  wives 
made  lonely  in  widowhood;  by  the  countless  orphaned  children 
never  again  to  be  clasped  in  the  embrace  of  their  father;  by 
countless  thousands  who  worked  abroad  and  at  home  in  the 
Red  Cross ;  and  by  those  other  countless  thousands  whose  services 
were  needed  to  support  the  Army  and  Navy  with  food,  clothing 
and  munitions,  on  the  farms  and  in  the  factories;  and  by  those 
who  had  passed  the  age  of  military  service  and  toil,  but  who 
gladly  contributed  money  with  which  to  support  the  needed 
services. 

In  view  of  the  pronouncements  of  our  Government,  and  the 
noble  sacrifices  of  our  people,  shall  we  not  recognize  democracy 
as  "the  greatest  thing  in  the  world?" 

Democracy's  Immediate  Problems 
We  have  won  the  war  so  far  as  overthrowing  the  menace  to 
world  liberty  for  which  a  foreign  autocrat  had  inaugurated  the 

[730] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY  21Q 

conflict.  We  have  "made  the  world  safe  for  democracy"  so  far 
as  American  institutions  were  endangered  by  foreign  ambition ; 
yet,  we  today  face  a  task  and  a  duty  no  less  serious  than 
that  which  called  us  to  fight  a  foreign  foe.  Our  duty  today 
is  to  make  such  further  sacrifices  and  to  take  such  further  meas- 
ures, and  so  carefully  study  the  relations  of  public  utilities  to 
government,  as  shall  bring  us  into  actual  possession  of  that 
democracy  for  which  our  country's  heroes  made  their  "last  sacri- 
fice," and  which  we  supported  by  every  power  we  possessed. 

Democracy  is  the  foundation  of  all  free  and  just  governments. 
It  includes  every  civic  principle  which  is  the  basis  of  liberty, 
equality  of  opportunity,  and  human  happiness.  It  involves  so 
many  phases  of  human  welfare  that  all  cannot  be  included  in 
this  discussion.  And  since  this  meeting  is  considering  as  its 
special  subject,  legislation  relative  to  public  utilities,  especially 
the  railroads,  chief  attention  must  be  given  to  this  branch  of 
economic  democracy.  But  before  concentrating  attention  upon 
this  branch  of  the  subject,  I  desire  to  call  attention  to  our  first 
great  present  duty  which  is  to  remove  from  their  places  of  power 
the  forces  of  "special  privilege"  which  have  gained  control  of 
those  functions  of  government  upon  which  our  economic  liberty 
and  prosperity  depends,  so  that  we  may  become  a  nation  free  in 
fact  as  well  as  in  name. 

The  problems  which  we  now  face  and  the  duty  we  must  meet 
were  stated  just  fifty-six  years  ago  so  clearly  and  wisely  by  our 
martyred  President  Lincoln  upon  the  field  of  a  great  battle  near 
the  close  of  a  war  which  had  forever  settled  the  question  of  hu- 
man slavery  in  this  country,  which,  although  it  is  fresh  in  the 
memory  of  all,  is  so  closely  related  to  our  present  condition  and 
duty  that  I  cannot  do  otherwise  than  recall  these  immortal 
words : 

"It  is  for  us,  the  living,  to  be  dedicated  to  the  unfinished 
work  which  they  who  fought  here  have  thus  far  so  nobly  ad- 
vanced. It  is  for  us  to  be  here  dedicated  to  the  great  task 
remaining  before  us — that  from  these  honored  dead  we  take 
increased  devotion  to  that  cause  for  which  they  gave  the 
last  full  measure  of  devotion ;  that  we  here  highly  resolve  that 
these  dead  shall  not  have  died  in  vain ;  that  this  nation,  under 
God,  shall  have  a  new  birth  of  freedom;  that  government  of 
the  people,  by  the  people,  for  the  people,  shall  not  perish  from 
the  earth." 

[731] 


220  RAILROAD  LEGISLATION  [Vol.  VIII 

Not  only  when  speaking  on  a  great  battlefield,  but,  also,  in  ad- 
dressing a  personal  friend  by  letter,  this  same  great  President, 
whose  memory  we  all  reverence  and  cherish,  made  another  utter- 
ance equally  related  to  the  conditions  we  face  today,  saying: 

"As  a  result  of  the  war,  corporations  have  been  enthroned, 
and  an  era  of  corruption  in  high  places  will  follow,  and  the 
money  power  of  the  country  will  endeavor  to  prolong  its  reign 
by  working  upon  the  prejudices  of  the  people  until  all  wealth 
is  aggregated  in  a  few  hands,  and  the  republic  is  destroyed. 
I  feel  at  this  moment  more  anxiety  for  the  safety  of  my  coun- 
try than  ever  before,  even  in  the  midst  of  war.  God  grant 
that  my  suspicions  may  prove  groundless." 

Is  there  a  single  American  who  has  carefully  studied  the 
growth  of  the  power  of  those  corporations  which  control  our 
great  public  utilities,  who  does  not  realize  that  the  prophecy  of 
our  martyred  President  has  already  become  largely  true? 

What  really  is  the  republic  which  the  great  President  feared 
would  be  destroyed  by  the  concentration  of  wealth? 

A  republic  is  the  citizenship  who  compose  it  and  who  have  or- 
ganized a  government,  as  their  agency  to  operate  the  mechanism 
of  democracy.  Though  the  government  continues  to  exist  in 
its  original  form,  if  it  becomes  corrupted,  and  is  operated  in 
the  interest  of  a  class  rather  than  in  the  interest  of  all,  the  re- 
public is  destroyed.  There  are  many  thoughtful  and  genuinely 
patriotic  citizens  who  are  forced  to  the  conclusion  that  the  rail- 
road power,  the  money  power,  and  the  other  forces  of  special 
privilege  which  have  been  born  from  these  two,  are  now  in  con- 
trol of  the  government,  and  that  the  real  republic  is  rapidly  mov- 
ing towards  destruction. 

In  view  also  of  the  fact  that  American  citizens  who  desire 
peacefully  to  secure  genuine  democracy  as  the  reward  promised 
them  for  the  sacrifices  they  have  made,  as  well  as  those  "whose 
zeal  is  not  in  accord  with  knowledge,"  and  who  advocate  force, 
are  alike  denounced  by  "special  privilege"  upon  every  possible 
occasion  as  "un-American,  and  anarchistic,"  I  wish  to  call  the 
attention  of  the  forces  of  special  privilege  to  the  fact  that  it  is 
they  themselves  who  have  been,  and  still  are,  sowing  the  seeds 
of  anarchy,  and  should  our  country  be  drawn  into  a  revolution  of 
force,  which  God  grant  may  not  be  the  case,  those  who  are  seek- 
ing through  corrupt  and  illegal  means  to  gain  economic  control 
of  the  nation,  will  be  found  to  be  the  chief  contributing  cause. 

[732] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY  221 

If,  instead  of  increasing  their  unjust,  political  and  financial  con- 
trol, they  will  join  the  real  friends  of  progress  who  seek  to  pro- 
mote universal  justice,  the  terrible  calamity  may  be  averted.  In 
connection  with  this,  and  in  order  that  they  may  cease  from  their 
attacks  upon  democracy,  I  quote  again  from  the  martyred  Lin- 
coln whom  they  profess  to  reverence,  who  said : 

"This  country  and  all  that  is  within  it  belongs  to  the  people 
who  inhabit  it,  and  whenever  they  shall  tire  of  the  existing 
form  of  government,  they  have  the  constitutional  right  to 
amend  it,  or  the  revolutionary  right  to  overthrow  it." 

I  have  quoted  more  fully  from  President  Lincoln  than  would 
otherwise  seem  necessary,  were  it  not  that  these  warnings  were 
evoked  by  conditions  which  already  he  feared  and  clearly  fore- 
saw, and  which  since  he  made  these  appeals,  have  verified  his 
fears.  His  prophecy  already  has  been  in  part  fulfilled,  because 
special  privilege  has  been  permitted  to  secure  the  control  of  our 
great  public  functions.  To  restore  Democracy,  by  nationalizing 
our  great  public  utilities  in  the  interest  of  the  public  good,  is 
the  great  work  now  before  us. 

Similar  warnings  were  sounded  103  years  ago  by  Thomas  Jef- 
ferson, the  illustrious  author  of  the  Declaration  of  Independence, 
when,  in  a  letter  to  George  Logan,  he  wrote : 

"I  hope  we  shall  take  warning  from  the  example  of  England 
and  crush  in  its  birth  the  aristocracy  of  our  moneyed  corpora- 
tions which  dare  already  to  challenge  our  Government  to  trial, 
and  bid  defiance  to  the  laws  of  our  country." 

Public  Otvnership  and  Democracy 
"Real  public  ownership  is  the  essence  of  democracy.  In- 
stead of  dividing  men  into  masters  and  mastered,  it  brings 
men  together  in  a  union  of  interest,  and  affords  the  conditions 
necessary  for  the  highest  traits  of  conscience  and  character." 
— Prof.  Frank  Parsons  of  the  Boston  Laiv  School,  in  "Th& 
City  for  the  People." 

A  highly  important  element,  and  probably  the  first  element 
of  democracy,  is  the  ownership  by  the  people,  and  the  administra- 
tion by  their  government  of  all  those  great  public  services  neces- 
sary for  the  general  welfare,  and  especially  those  which  either 
by  nature  or  by  law  are  monopolies.  There  can  be  no  more  nat- 
ural and  just  function  of  government  than  the  public  ownership 

[733] 


222  RAILROAD  LEGISLATION  [Vol.  VIII 

and  operation  of  those  utilities  and  services  which  are  of  uni- 
versal need  for  promoting  general  prosperity  and  happiness. 
Among  those  services  are  the  transportation  of  our  persons,  our 
food,  fuel  and  the  various  necessities  of  life  both  from  farms  and 
factories ;  the  transmission  of  intelligence  by  telephone,  telegraph, 
post  or  by  any  other  method  which  human  genius  may  in  the 
future  devise;  the  ownership  and  operation  by  municipalities, 
of  street  railways',  gas,  electricity  and  such  other  services  as  the 
citizens  of  any  city  may  deem  best  publicly  to  operate. 

The  principles  underlying  democracy  and  public  ownership 
may  be  divided  into  two  classes.  One  is  connected  with  ideal 
government  in  its  relation  to  civil  liberty  and  equality  of  oppor- 
tunity. This  we  call  "democracy,"  and  "political  justice."  The 
other  relates  to  providing  those  material  things  and  services 
necessary  to  our  welfare  and  happiness  which  we  call  "economic 
justice."  Both  are  closely  interwoven,  and  together  form  the 
sum  of  human  justice  which  we  know  as  "social  justice,"  a  term 
inclusive  of  all  the  relations  of  mankind  in  an  ideal  common- 
wealth. 

Liberty  and  equality  are  essential  principles  of  justice  or  "de- 
mocracy" in  its  widest  sense,  as  determined  by  social  inheritance ; 
but  to  analyze  correctly,  social  relations,  a  broad  comprehension 
of  economic  conditions  is  necessary.  It  was  the  desire  to  study 
questions  of  justice  and  civil  liberty  which  led  me  many  years 
ago  to  seek  information  concerning  the  great  public  utilities  and 
their  relation  to  national  life  and  public  welfare. 

Constant  and  intimate  relations  for  a  number  of  years  with  the 
railway,  telegraph,  telephone,  express  and  various  other  public 
utilities  had  brought  valuable  experiences  in  my  business  rela- 
tions as  manufacturer  and  shipper.  Investigations  carried  on 
while  a  member  of  Congress  added  to  this  experience  facts  of 
an  official  nature.  Repeated  visits  abroad  gave  opportunity  to 
investigate  personally  the  conditions  under  which  public  utilities 
were  being  operated  in  foreign  lands  under  both  public  and 
private  ownership.  The  last  visit  occupied  fourteen  months  in 
the  year  1912-13,  during  which  time  fourteen  countries  were 
visited.  These,  together  with  those  investigated  during  other 
trips,  included  Austria,  Bavaria,  Belgium,  Denmark,  Egypt, 
England,  France,  Greece,  Holland,  Italy,  Norway,  Prussia,  Sax- 
ony, Scotland,  Sweden,  and  Switzerland. 


[734] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY  223 

Rapid  Spread  of  Public  Ownership  Abroad 
All  of  these  countries,  sixteen  in  number,  publicly  own  and 
operate  their  telephone  and  telegraph  systems  as  parts  of  the 
postal  service.  Ten  publicly  own  and  operate  their  entire  rail- 
way systems,  four  own  them  in  part,  while  only  two  (England 
and  Scotland)  have  been  operating  their  railroads  entirely  under 
private  ownership.  Upon  the  outbreak  of  the  war,  the  govern- 
ment of  these  two  countries  took  possession  of  the  railroads 
also,  and  will  assume  actual  and  permanent  government  owner- 
ship in  the  near  future.  Russia,  Japan,  Australia,  and  New 
Zealand  also  publicly  own  and  operate  their  entire  railroad  sys- 
tems, while  China,  Mexico,  and  the  countries  of  South  America 
own  theirs  in  whole  or  in  part.  All  of  these  own  their  telephone 
and  telegraph  systems  as  well,  and  many  countries  own  the  ma- 
jority of  their  municipal  utilities.  The  United  States  of  America 
is  the  only  nation  in  the  world  which  does  not  publicly  ozvn  and 
operate  its  telephone  and  telegraph  systems  as  government  func- 
tions, and  will  have  the  unenviable  distinction  of  being  the  only 
civilized  country  controlled  by  special  privilege,  should  she  alone 
decide  to  continue  this  intolerable  system  of  "invisible  govern- 
ment." 

This  tendency  to  be  ruled  by  private  monopoly  led  Ambassador 
Bryce  in  his  American  Commonwealth  to  declare :  "In  England 
we  have  the  form  of  monarchy  with  the  spirit  of  democracy; 
while  in  America  there  exists  the  form  of  democracy  with  the 
spirit  and  essence  of  monarchy."  This  statement  is  unfortunately 
too  true,  due  to  the  fact  that  in  England  as  well  as  in  all  the  other 
countries  of  Europe,  public  utilities  are  largely  owned  and  op- 
erated by  the  people,  their  operation  being  considered  necessary 
and  natural  governmental  functions.  Those  few  minor  undertak- 
ings which  are  allowed  to  be  privately  owned  in  these  countries 
are  considered  as  public  trusts  which  are  required  to  give  im- 
partial service  and  make  full  accounting  to  the  people  respect- 
ing their  stewardship. 

Public  Ownership  a  Natural  Government  Function  and  Necessary 
to  Secure  Democracy  and  Justice 

In  America,  on  the  other  hand,  the  private  monopolies  which 
own  and  control  the  great  public  utilities  have  practically  become 
the  financial  and  political  masters  of  the  people,  for,  by  means 
of  unjust  rates  made  possible  by  fictitious  capitalization   dishonest 

[735] 


224  RAILROAD  LEGISLATION  [Vol.  VIII 

financing,  and  illegal  practices,  they  have  grown  so  powerful  as 
largely  to  control  law  and  government.  By  secret  rates  and  re- 
bates they  crushed  out  competition  and  obtained  monopoly.  By 
interlocking  directorates  and  combination  of  capital  they  have 
controlled  or  defied  law  and  evaded  regulation.  Through  con- 
trol of  much  of  the  press  and  other  means  of  public  education 
they  have  influenced  public  opinion,  largely  controlling  nomina- 
tions and  elections  to  public  office,  and  ultimately  directing  the 
making  and  administration  of  law. 

When  a  few  men  thus  control  the  great  functions  of  govern- 
ment, that  equality  of  opportunity  which  is  fundamental  to  de- 
mocracy can  not  exist.  There  can  be  no  function  of  government 
more  natural  and  necessary  to  the  promotion  of  general  pros- 
perity and  happiness  than  the  public  ownership  and  operation  of 
all  those  agencies  which  contribute  to  the  public  good  and  which 
by  their  nature  are  monopolies ;  and  these  include  not  only  the 
public  utilities  devised  by  man,  but  many  of  those  vast  resources 
of  nature  which  the  Almighty  placed  upon  and  below  the  earth 
for  the  service  of  all  his  creatures. 

Since  our  National  Constitution  was  written  a  century  and 
a  quarter  ago,  human  genius  has  harnessed  nearly  all  the  forces 
of  nature  in  so  many  ways,  that  there  is  scarcely  a  function  in 
our  daily  life  that  is  not  performed  by  them,  nor  a  condition 
of  life  which  they  have  not  revolutionized.  Then,  we  could 
speak  only  within  the  radius  of  our  voices ;  now,  we  speak  from 
ocean  to  ocean.  Then  courier,  stage,  or  slow  sailing  boat  carried 
our  written  messages ;  now,  a  few  seconds  suffice  to  encircle  the 
gjobe.  Then,  our  persons  and  the  products  of  our  farms  and 
factories  traveled  on  land  at  the  rate  of  twenty  miles  a  day; 
now,  our  fastest  trains  exceed  a  thousand. 

As  the  Creator  of  the  Universe  gave  to  all  mankind  from  the 
foundation  of  the  world  to  the  end  of  time,  the  air,  the  water 
the  sunlight,  the  heat,  the  treasures  of  the  earth  with  all  their 
powers  and  possibilities,  so  it  devolves  upon  the  city,  the  State 
and  the  nation  to  preserve  inviolate  to  its  citizens  the  widest  and 
freest  use  of  these  gifts  for  the  common  welfare.  This  cannot 
be  done  where  private  monopoly  exists,  which  permits  one  man 
or  a  group  of  men  to  usurp  the  rights  which  belong  to  all. 

"Liberty — Equality — Fraternity'' 
When  first  traveling  in  the  countries  of   Europe  in   1875  to 
study  their  social  institutions  as  well  as  the  masterpieces  of  art 

[736] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY         225 

and  architecture,  and  the  monuments  of  antiquity,  I  observed 
with  interest  over  the  entrances  to  public  buildings  and  churches 
in  France  the  words  "LIBERTY,  EQUALITY,  FRA- 
TERNITY," the  impressive  motto  of  the  French  revolution, 
forced  upon  the  world  by  the  tyranny  of  existing  autocracy ;  and 
when  extending  these  travels  to  other  countries  it  was  interesting 
to  observe  the  extent  to  which  applied  democracy  was  enjoyed 
by  the  people. 

In  order  to  secure  indisputable  evidence  of  the  success  of  pub- 
lic ownership  with  which  to  disprove  misstatements  continually 
being  made  in  the  press,  I  procured  during  the  travels  referred 
to,  a  large  and  valuable  collection  of  official  reports  and- data  of 
an  absolutely  authoritative  nature,  besides  personally  taking  over 
five  hundred  photographs  of  the  various  utilities  in  operation  in 
many  countries.  To  this  collection  I  added  several  hundred 
photographs  taken  by  official  photographers. 

This  interesting  collection  contains  street  railway  tickets  from 
many  cities  and  countries  of  Europe,  with  fares  of  but  one  cent 
for  moderate  distances,  and  averaging  approximately  two  cents 
for  all  distances.  These  gave  superior  service,  from  the  receipts 
of  which  each  city  made  a  large  profit  applied  for  reducing 
taxation  or  swelling  the  fund  of  the  "common  good." 

In  England  the  very  highest  quality  of  coal  gas  was  being  sup- 
plied under  municipal  ownership,  in  some  instances  at  rates  as 
low  as  twenty-five  cents  per  1,000  cubic  feet.  And  even  at  this 
rate  a  profit  was  made,  owing  to  honest  and  efficient  administra- 
tion. 

Electricity  was  everywhere  supplied  at  rates  lower  than  those 
charged  by  private  companies  in  America,  notwithstanding  the 
fact  that  in  most  of  these  countries  there  is  but  little  water  power. 

Local  telephone  calls  were  two  cents,  and  phones  in  homes 
and  office  cost  less  than  half  the  American  rate. 

Checking  of  baggage  or  parcels  for  storage  at  the  railway  sta- 
tions was  only  two  cents,  as  against  ten  cents  in  the  United 
States.  And  all  these  public  utilities  were  efficiently  adminis- 
tered and  gave  a  profit  to  the  government.  That  these  rates  to 
the  general  public  have  not  been  established  at  the  expense  of 
the  employees  we  demonstrate  below. 

Public  Ownership  Brings  Justice  to  Labor 

The  rule  prevailing  in  both  municipal  and  national  utilities  in 
countries  where  public  ownership  exists,  is  that  labor  shall  be 

[737] 


226  RAILROAD  LEGISLATION  [Vol.  VIII 

paid  not  less  than  the  full  wages  accorded  by  private  companies 
for  like  service,  nor  less  than  the  amount  fixed  by  labor  unions. 
In  many  countries  a  minimum  wage  law  exists  for  government 
employees  upon  the  railroads,  telegraph,  telephone  systems,  etc., 
and  this  rule  exists  in  principle  under  municipal  ownership  in 
nearly  all  cities. 

Strikes  and  labor  trouble  of  any  kind  are  so  extremely  rare 
as  to  be  almost  unknown  under  public  ownership,  for  the  public 
has  no  interest  nor  desire  to  treat  its  own  "citizen  employees" 
otherwise  than  with  generosity  and  justice.  It  desires  to  receive 
the  best  service  and  is  glad  to  give  a  full  equivalent.  The  sole 
consideration  under  public  ownership  is  to  secure  to  everyone 
perfect  service  under  just  conditions,  while  under  private  owner- 
ship as  practiced  in  America  the  sole  motive  is  to  obtain  private 
profit ;  and  even  where  good  service  is  given,  the  motive  remains 
the  same. 

Under  public  ownership,  laws  and  agreements  are  entered  into 
providing  for  conciliation,  arbitration,  etc.,  by  which  all  ques- 
tions are  usually  settled  quickly  and  amicably.  Employees  being 
partners  in  the  business  and  enjoying  the  public  service  for 
themselves  and  their  families  have  no  motive  to  destroy  that 
which  tends  to  their  own  welfare.  The  facts  already  given  would 
seem  sufficient  to  show  that  a  degree  of  social  justice  greater 
than  is  known  elsewhere  prevails  where  public  ownership  exists, 
for  the  public  as  consumers  secure  the  necessities  of  life  upon 
terms  far  more  just  than  could  be  otherwise  possible,  while  em- 
ployees receive  better  wages  and  better  treatment  as  well. 

It  is  highly  significant  that  the  employees  of  our  railways  are 
unanimous  for  government  ownership  and  willing  to  contribute 
to  help  make  it  a  permanent  success. 

Public  Ownership  in  Accord  With  Our  Constitution 
The  greatest  statesmen  and  constitutional  lawyers  of  every 
democratic  country  agree  in  the  view  that  it  is  not  only  the  right 
but  the  duty  of  government — national,  state,  and  municipal — to 
perform  every  function  which  is  necessary  to  protect  and  extend 
the  rights,  opportunities,  and  happiness  of  its  citizens.  In  fact, 
this  was  the  supreme  purpose  of  the  founders  of  our  Republic, 
and  in  order  to  secure  and  protect  these  rights  they  placed  at  the 
head  of  our  National  Constitution  the  following  preamble : 

"We,  the  people  of  the  United  States,  in  order  to  form  a 

[738] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY         227 

more  perfect  union,  establish  justice,  insure  domestic  tran- 
quility, provide  for  the  common  defense,  promote  the  general 
welfare,  and  secure  the  blessings  of  liberty  to  ourselves  and 
to  our  posterity,  do  ordain  and  establish  this  Constitution  for 
the  United  States  of  America." 

It  must  be  noted  that  they  sought  to  provide  and  secure  to 
posterity — the  people  of  today — all  the  blessings  which  accom- 
pany civil  liberty.  They  hoped  to  secure  for  our  people  do- 
mestic tranquility,  which  is  impossible  under  private  railway 
control.  The  other  purposes  are  incapable  of  being  realized 
under  private  monopoly  of  transportation.  Should  our  present 
lawmaking  power  refuse  in  this  great  crisis  to  provide,  in  letter 
as  well  as  in  spirit,  progressive  legislation  necessary  to  carry  out 
the  fundamental  principles  of  the  Constitution,  there  is  left  an 
appeal  to  the  citizenship  which  our  martyred  President,  Abraham 
Lincoln,  stated  in  the  following  words: 

"This  country  and  all  its  institutions  belong  to  the  people 

who  inhabit  it,  and  whenever  they  shall  tire  of  their  existing 

government  they  have  the  constitutional   right   to   amend  it, 

or  the  revolutionary  right  to  overthrow  it." 

If,  then,  this  principle  that  the  will  of  the  people  should  rule 
has  found  its  advocates  among  makers  of  laws  and  constitutions 
throughout  the  centuries  when  the  conditions  of  society  were 
more  simple  than  now,  and  when  nations  have  owned  and  op- 
erated their  own  highways,  post  offices,  etc.,  is  it  not  much  more 
natural,  necessary,  and  just,  that  these  same  principles  of  public 
ownership  should  be  extended  under  the  present  and  more  com- 
plicated conditions  of  society,  when  the  various  forces  of  nature 
are  imperatively  called  upon  to  render  service?  Justice  replies 
"Yes." 

We  are  living  in  an  era  of  evolution  and  revolution.  De- 
mocracy must  triumph  over  greed.  That  "invisible  government" 
of  private  monopoly  which  sets  at  nought  the  will  of  the  people 
through  the  combined  power  of  the  railways,  telegraph,  telephone, 
gas,  electricity,  street  railways,  and  other  public  utilities,  must 
be  done  away  with  in  the  name  of  liberty. 


[739] 


228  RAILROAD  LEGISLATION  [Vol.  VIII 

The  Publicly  Owned  Railroads  of  Switzerland — How  the  Rights 

of  the  People  Were  Safeguarded  from  the  Beginning  and 

Hozv  Federal  Ownership  of  the  Swiss  Raihvays  Was 

Acquired 
On  the  7th  of  April,  1851,  a  special  commission  of  the  national 
council  itself  made  an  official  recommendation  providing  for  the 
public  ownership  and  operation  of  the  railways  under  joint 
government  control  (national  and  state).  The  national  council 
itself  refused  to  follow  the  vote  of  this  commission,  and  in  July, 
1852,  declared  in  favor  of  private  ownership.  The  ^rights  of  the 
people,  however,  were  thoroughly  safeguarded  both  in  the  fed- 
eral and  cantonal  law  by  abundant  provisions  limiting  the  rates 
of  charge  and  profits,  and  providing  that  construction  and  opera- 
tion should  be  carried  out  with  honesty,  efficiency,  and  economy, 
and  that  the  Government  at  all  times  should  have  access  to  the 
records  and  accounts,  which  were  to  be  kept  in  a  clear  and  com- 
plete manner.  The  franchises  also  contemplated,  from  the  very 
first,  the  ultimate  taking  over  of  the  properties  by  the  authorities 
either  cantonal  or  federal  on  just  terms,  whenever  the  public  de- 
cided either  that  the  profits  of  the  companies  were  too  great,  or 
that  public  management  would  insure  them  better  service ;  and 
compelled  the  companies  honestly  to  advance  construction  and 
operation,  to  give  efficient  management,  and  perform  the  service 
at  just  rates;  otherwise  the  nation  would  at  once  exercise  its 
rights  and  acquire  the  roads  for  government  operation. 

The  government  had  by  the  year  1890  acquired  rather  a  large 
control  by  purchase  of  the  majority  of  stock  in  some  of  the  most 
important  systems.  As  the  terms  for  which  many  of  the  fran- 
chises had  been  given  to  the  companies  would  expire  in  the 
spring  of  1898,  the  Swiss  people  invoked  the  rights  which  they 
had  long  enjoyed  through  the  system  of  direct  legislation,  and 
by  an  initiatory  petition  dema-nded  that  the  council  (the  mem- 
bers of  which  were  already  favorable  to  this  action),  should 
frame  a  bill  providing  for  the  taking  over  of  the  most  important 
railway  systems  and  submit  this  as  a  referendum  to  be  voted  upon 
at  the  forthcoming  election. 

The  salient  features  of  this  bill  were  that  the  government 
should  purchase  and  take  over  at  the  expiration  of  the  franchises, 
the  five  important  railway  systems,  approximately  1,700  English 
miles.  The  bill  thus  submitted  to  the  people  for  their  votes  in- 
cluded every  provision  possible  for  safeguarding  the  public  in- 

[740] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY         229 

terests,  including  the  financing,  the  accounting,  justice  to  em- 
ployees and  users,  and  with  a  system  of  administration  founded 
upon  a  highly  intelligent  and  practical  basis.  An  administrative 
council  of  eleven  members  was  provided  who  were  to  keep  con- 
stantly in  touch  with  the  various  cantonal  governments  and  give 
careful  attention  to  the  needs  of  the  people. 

Why  the  Swiss  Took  Over  Their  Railways  Under  Public 

Ownership 

In  connection  with  the  bill  which  the  national  council  had 
drafted  at  the  request  of  the  voters  to  provide  for  public  owner- 
ship of  the  railroads,  the  national  council  issued  a  message  em- 
bodying the  reasons  which  compelled  it  to  recommend  the  passage 
of  the  bill.    Among  these  reasons  were  the  following: 

1.  That  the  unification  of  the  systems  under  one  head  would 
reduce  the  expense  of  operation  by  doing  away  with  useless 
duplication. 

2.  Federal  operation  of  the  lines  being  conducted  by  a  single 
administration  could  provide  for  a  better  trained  administrative 
body  than  a  large  number  of  private  companies. 

3.  Since  Prussia,  Austria,  and  other  states  were  enjoying  the 
earnings  from  their  publicly  owned  railroads  which  would  soon 
place  them  out  of  debt,  the  Swiss  railroads  if  privately  owned 
could  not  compete  with  them  in  rates,  and  thus  higher  charges 
must  be  paid  by  the  Swiss  people. 

4.  The  federal  council  also  made  it  clear  in  this  interesting 
message  that  continued  private  ownership  was  a  menace  to  the 
political  life  of  Switzerland,  because  the  profits  accruing  from 
the  roads  left  the  country  in  the  form  of  dividends  to  foreigners 
rather  than  contributing  to  the  extension  and  improvement  of 
their  own  railways. 

5.  Higher  wages,  reasonable  hours,  and  better  living  condi- 
tions would  be  enjoyed  by  the  railway  employees  under  govern- 
ment ownership.  Upon  this  subject  the  message  also  says: 
"Private  companies,  as  a  rule,  pay  high  salaries  for  the  per- 
formance of  certain  functions,  and  to  make  up  for  these  expendi- 
tures they  economize  upon  wages  of  common  employees,  who, 
since  they  are  very  numerous,  occasion  the  great  bulk  of  ex- 
penditures." 


[741] 


230  RAILROAD  LEGISLATION  [Vol.  VIII 


Public   Ownership  Submitted  By  Referendum   to   the  Popular 
Vote  and  Accepted  By  An  Overwhelming  Majority 

The  vote  on  the  proposition  for  the  national  acquisition  of  the 
railway  system  was  taken  on  the  date  fixed  by  law,  February  20, 
1898.  It  called  out  an  unusual  number  of  voters.  Out  of 
734,000  citizens  having  the  right  to  vote,  570,000,  in  round  num- 
bers, exercised  that  right.  This  is  the  largest  proportion  of  votes 
ever  cast.  The  purchase  law  was  accepted  by  a  majority  of  over 
200,000,  the  votes  standing  386,634  for,  to  182,718  against.  The 
result  showed  an  overwhelming  majority  in  favor  of  national 
ownership. 

My  investigations  of  the  practical  working  of  this  national 
system  of  railways  extending  over  twenty  years,  lead  to  very  de- 
cided convictions  respecting  the  efficiency  of  this  system  in  com- 
parison with  our  own  deplorable  lack  of  efficiency.  Permit  me 
to  give  details  respecting  rates,  quality  of  service,  etc. 

Swiss  "Abonnement"  Tickets  and  Regular  Fares  and  Quality  of 
the  Various  Classes  of  Service 

The  Swiss  federal  railroad  administration  issued  until  after 
the  beginning  of  the  present  war,  "Abonnement"  (special  season) 
tickets,  good  for  unlimited  travel  on  all  the  federal  lines  (1,701 
miles)  and  on  all  the  steamers  of  the  Swiss  lakes  (Geneva, 
Zurich,  Lucern,  Neuchatel,  etc.)  : 

1st  Class        2nd  Class        3rd  Class 

Two  weeks $13.50  $9.65  $6.80 

One  month 21.25  14.50  10.60 

Three   months 52.11  36.67  26.05 

Six  months 81.56  56.94  40.53 

One  year 129.31  90.71  64.66 

Respecting  the  quality  of  service  of  the  various  classes :  The 
native  Swiss  ride  almost  entirely  (except  the  wealthiest)  in  the 
third  class.  It  is  clean,  sanitary,  and  comfortable,  but  lacks 
upholstery.  The  second  class  is  used  largely  by  the  wealthy 
Swiss  and  foreign  tourists,  including  Americans,  except  the  very 
wealthy,  and  in  some  cases  those  who  desire  to  appear  wealthy. 
It  is  practically  equal  to  the  first  class  in  America.  The  first  class 
is  but  very  little  different  from  the  second,  and  in  many  cases 

[742] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY         231 

the  first  and  second  are  precisely  the  same,  the  only  thing  which 
distinguishes  them  being  the  label.  Both  classes  are  often  in  the 
same  car,  divided  with  a  partition,  but  the  "poster"  showing  the 
class  is  often  changed  as  circumstances  require.  I  usually  used 
the  second  class.  This  ticket  gave  me  the  right  to  travel  at  pleas- 
ure for  six  weeks,  twenty-four  hours  daily  if  I  desired  over 
these  highly  expensive  roads,  for  $28.00,  less  than  seventy  cents 
per  day !  There  were  always  reputable,  intelligent  and  delightful 
people  to  meet,  and  the  atmosphere  seemed  entirely  democratic. 

For  regular  journeys  the  rates  per  mile  one  way  were  as  fol- 
lows :  First  class,  3.2  cents ;  second  class,  2  cents ;  third  class,  1.6 
cents. 

The  three  classes  averaged  2.3  cents  per  mile  for  single  jour- 
neys, and  for  round  trips  about  1.5  cents  per  mile  each  way. 
Fifty-five  pounds  of  hand  luggage  are  allowed  to  be  carried  free 
in  the  passenger  cars. 

As  has  been  already  mentioned,  the  Swiss  railways,  owing  to 
the  country  being  almost  entirely  mountainous,  and  abounding 
with  many  chasms,  requiring  bridges  at  dizzy  heights,  and  con- 
struction of  countless  tunnels  being  necessary,  the  actual  cost 
of  construction  of  the  road  is  many  times  greater  per  mile  than 
in  any  other  country.  Marvelous  engineering  feats  have  been 
accomplished  in  the  construction  of  these  roads,  which  have 
never  been  executed  elsewhere  in  the  world.  Among  these  are 
wonderful  "corkscrew"  tunnels  in  which  the  trains,  after  crossing 
a  chasm  or  canyon  over  a  very  high  bridge,  move  around  within 
the  mountain,  in  spirals  like  those  of  a  corkscrew  or  coiled 
springs,  in  order  to  make  grades  that  will  permit  their  emerging 
200  or  500  feet  or  more  at  a  point  directly  below  or  above  the 
entrance,  depending  on  the  direction  in  which  they  are  going. 
One  of  the  most  famous  of  these  is  a  double  corkscrew,  shaped 
like  the  figure  8.  Of  the  well  known  tunnels,  the  St.  Gothard  is 
nine  miles,  and  the  Simplon  (double  track),  is  twelve  miles 
in  length,  the  two  costing  $21,000,000.  There  are  over  1,000 
tunnels  on  the  Swiss  Federal  System. 

The  Higher  Cost  of  the  Swiss  Railways  and  the  Loiver  Fare 

With  the  unparalleled  difficulties  of  construction  in  the  Alps, 

the  actual  cost  of  the  Swiss  railways  must  have  exceeded  five 

times  that  of  the  average  of  the  American  roads,  and  had  they 

been  promoted  and  financed  under  American  methods  the  rates 

[743] 


232  RAILROAD  LEGISLATION  [Vol.  VIII 

of  fare  would  naturally  be  five  times  as  great  as  they  now  are. 
But  under  the  honest  building  and  management  that  the  Swiss 
law  required,  the  fares  for  regular  trips  average  practically  the 
same  as  in  America,  while  the  "season"  tickets  are  only  a  frac- 
tion of  the  charges  made  in  our  country. 

When  the  government  finally  took  the  roads  over,  about  1,700 
miles,  it  paid  for  them  approximately  $199,000,000,  or  $117,000 
per  mile  on  the  average,  including  a  large  mileage  of  tunnels  and 
bridges  averaging  $1,000,000  per  mile. 

A  suggestive  account  of  the  purchase  of  these  lines  by  the 
Swiss  Government  was  prepared  for  the  Musee  Social  of  Paris, 
by  its  Swiss  correspondent,  Mr.  Horace  Micheli,  a  translation 
of  which  may  be  found  in  Volume  III,  No.  6,  December,  1898, 
of  the  American  Economic  Association.  Attention  here  is  called 
to  the  protection  the  Swiss  people  enjoyed  in  taking  over  their 
railroads  under  public  ownership  through  the  constitutional  and 
democratic  right  of  "direct  legislation,"  with  the  "initiative  and 
referendum." 


COMPARISON     OF     SWISS     DEMOCRACY     WITH     AMERICAN 

RAILWAY  AUTOCRACY 

"Division  of  the  New  World" — Two  Railway  Presidents  Aptly 
Calling  Themselves  "Cortes"  and  "Pizarro,"  Believing  They 
Had  Secured  the  Control  of  the  American  People,  Pro- 
posed a  Division  of  America  Between  Them 

In  the  investigation  of  the  records  of  the  Louisville  &  Nash- 
ville Railroad  Co.,  letters  were  discovered  between  Milton  H. 
Smith,  president  of  the  L.  &  N.  Road,  and  Samuel  Spencer, 
president  of  the  Southern  Railway,  giving  vent  to  their  fullness 
of  joy  in  having  (as  they  thought)  obtained  control  of  America, 
as  had  Cortez  and  Pizarro,  of  the  natives,  four  centuries  ago. 
This  aptly  illustrates  the  illimitable  ambition  of  railway  financiers. 
The  following  from  the  letters  of  these  two  railroad  presidents 
is  extracted  from  pages  369-372  of  the  evidence  and  report  of 
the  Interstate  Commerce  Commission  covering  their  investiga- 
tion of  the  Louisville  &  Nashville  Railroad  system. 

"A  letter  from  President  Smith,  of  the  Louisville  &  Nashville 
Railroad,  to  President  Spencer,  of  the  Southern  Railway: 

[744] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY         233 

(Personal  and  confidential) 
On  Pennsylvania  Railroad  Train  No.  21, 
Samuel  Spencer,  Esq.,  February  22,  1896. 

President  Southern  Railway,  60  Broadway,  New  York  City. 
Dear  Sir : 

Pizarro. — How  shall  we  divide  the  new  world? 

Cortez. — I  will  take  North  America  and  you  can  have  all  of 
South  America,  except ,  and  neither  of  us  will  do  any- 
thing to  the  Isthmus  without  notice  to  and  cooperation  of  the 
other. 

Pizarro. — While  Patagonia  is  not  a  very  large  or  important 
part  of  the  world,  yet,  perhaps,  it  is  as  much  as  I  can  tote. 

Refer  to  typewritten  report  of  our  interview  at  Kenesaw, 
Ga.,  on  October  28,  1894,  and  to  the  interviews  and  corre- 
spondence that  have  taken  place  since  that  date,  and  to  that 
portion  of  our  interview  of  this  morning  relating  to  the  future 
of  certain  railroads  that  are  or  may  be  tributary  or  competitive 
with  roads  controlled  by  the  L.  &  N.  R.  R.  and  the  Southern 
Ry. 

May  it  not  be  well  to  review  the  subject  and  perhaps  make 
our  understandings  more  specific? 

Your  affairs,  since  our  interview  in  October,  1894,  prog- 
ressed with  rapidity,  and  without,  so  far  as  I  know,  encoun- 
tering serious  difficulties.  You  have  acquired  the  G.  S.  &  F., 
the  Atlanta  &  Florida,  and  the  Central  Railroad  has  been  re- 
organized in  accordance  with  your  plans.  I  do  not  recall  now 
what  has  been  done  with  the  Macon  &  Northern,  nor  what  has 
been  done  with  the  G.  M.  &  G.,  Macon  &  B'ham,  and  one  or 
two  other  roads,  altho  I  believe  you  told  me  that  your  inten- 
tion was  to  allow  the  Macon  &  B'ham  to  be  abandoned.  The 
Paducah,  Tenn.  &  Alabama  and  Tenn.  Midland  Rds.  have 
been  disposed  of  as  anticipated.  The  L.  &  N.  will  not  compete 
for  the  control  of  the  B'ham,  Sheffield  &  Tenn.  River  Rd., 
provided  you  will  acquire  it,  should  it  become  necessary  to  do 
so  to  prevent  its  extension  into  Birmingham,  or  will  not  per- 
mit it  to  get  into  a  position  where  it  may  become  a  disturber. 
The  L.  &  N.  Rd.  will  not  compete  for  the  control  of  the  Mobile 

&  Birmingham  with  the  expectation  that  you  will  acquire  it. 

*         *         * 

I  have  advised  Mr.  Belmont  of  our  agreement  that  neither 
party   will   acquire   the   property   of   the   Marietta   &   North 

[745] 


234  RAILROAD  LEGISLATION  [Vol.  VIII 

Georgia  Railroad  Co.  without  the  consent  of  the  other.  You 
may,  therefore,  freely  communicate  with  him  upon  the  subject, 
and  I  assume  he  will  do  likewise. 

Yours  truly, 
(Milton  H.  Smith),  President." 

"Letter  from  Samuel  Spencer,  president  of  the  Southern  Rail- 
way, to  M.  H.  Smith,  president  of  the  Louisville  &  Nashville 
Railroad  Co. 

New  York,  February  29,  1896. 

Mr.  M.  H.  Smith, 

President  L.  &  N.  R.  R.,  Louisville,  Ky. 

Dear  Sir:    Your  letter  of  the  22d  instant. 

Pizarro. — Since  our  last  conversation,  the  division  of  the 
New  World  between  us  has  made  some  progress. 

Cortez. — Yes ;  you  seem  to  have  acquired  Patagonia,  and  I 
have  secured  a  considerable  part  of  North  America  which 
touched  my  former  territory,  but  it  seems  to  me  you  have 
acquired  a  considerable  neck  of  the  Isthmus  which  is  the  con- 
necting link  between  us.  Was  it  understood  that  connecting 
links  which  touched  both  of  us  should  be  a  matter  of  consulta- 
tion before  acting  or  not? 

Pizarro. — *  *  *  I  agreed  that  it  is  desirable  to  renew 
the  subject  and,  if  practicable,  to  make  our  understanding 
more  specific.  The  principles  on  which  I  think  this  under- 
standing should  be  based  are : 

(1)  That  neither  the  L.  &  N.  nor  the  Southern  shall  acquire 
lines  in  the  territory  of  the  other,  and  that  lines  connecting 
with  or  touching  one  and  not  the  other  shall  be  regarded  as  in 
the  territory  of  the  one  which  they  connect  or  touch. 

(2)  That  neither  will  acquire  lines  allied  by  former  owner- 
ship, lease,  or  otherwise,  to  the  other,  and  which  at  the  moment 
are  not  controlled  by  reason  of  pending  reorganizations  or 
other  cause. 

(3)  That  neither  will  acquire  lines  which  connect  with  or 
touch  both,  either  directly  or  thru  subordinate  or  controlled 
lines  without  previous  consultation  and,  if  possible,  agreement. 

(4)  That  neither  will  foster  the  construction  of  new  lines 
or  the  completion  of  unfinished  ones  into  the  territory  of  the 
other,  but  when  questions  with  reference  to  such  lines  arise, 
we  shall  proceed  by  agreement  with  each  other,  if  possible. 

[746] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY         235 

Will  you  please  consider  this  and  say  if  such  a  declaration 
of  principles  is  satisfactory? 

*     *     *  Yours  very  truly, 

S.  Spencer,  President." 

The  above  correspondence  disclosing  the  policy  and  purpose 
of  our  railway  executives  absolutely  to  control  America  is  so 
clearly  expressed  as  to  need  no  comment. 

American  Railway  Exploitation   Under  Private  Ownership 

The  promotion,  financing,  and  administration  of  American  rail- 
roads marks  a  dark  but  impressive  and  instructive  chapter  in  our 
country's  history.  It  is  a  record  of  a  nation's  shame,  which  can 
only  be  fully  atoned  for  when  the  American  people  shall  have 
supplanted  the  "invisible  government"  of  private  financial  au- 
tocracy with  real  and  living  democracy,  by  owning  and  operating 
for  the  common  welfare  all  those  natural  functions  of  govern- 
ment necessary  for  the  common  good.  Then  only  will  America 
enter  into  her  destiny  and  enjoy  the  fruition  of  the  labors  and 
hopes  of  its  people.  Further  experimentation  with  regulation 
under  the  false  notions  of  the  necessity  of  private  control,  com- 
petition, initiative,  etc.,  must  be  stopped  in  the  interest  of  the 
public  welfare. 

It  is  an  unpleasant  task  to  bring  before  the  public  view  the 
manner  in  which  government,  the  press,  and  politics  have  been 
corrupted,  and  the  rights  of  citizens,  both  political  and  economic, 
imperiled  or  destroyed ;  yet  it  is  due  to  the  American  people  that 
they  know  the  truth,  and  thus  be  able  to  select  and  apply  remedies 
that  shall  be  safe  and  sufficient  for  all  time,  to  protect  and  ad- 
vance justice  and  democracy. 

As  our  country  now  faces  the  problem  as  to  who  shall  own 
and  operate  the  railways  in  the  future — private  interests  for 
private  profit,  or  American  citizens  for  the  common  good — 
whether  the  railways  shall  control  the  people  or  the  people  con- 
trol the  railways — and  since  the  determination  of  this  question 
by  Congress  will  be  largely  based  on  the  manner  in  which  these 
public  agencies  have  been  recently  administered,  it  is  important 
that  the  history  of  private  operation  during  the  past  20  years 
be  known. 

While  facts  of  recent  occurrence  will  be  most  largely  con- 
sidered; yet  it  is  also  important  to  view  the  foundations  laid 
many  years  ago  on  which  modern  railroad  financing  and  admin- 
istration have  been  built. 

[747] 


236  RAILROAD  LEGISLATION  [Vol.  VIII 

Promotion  of  Pacific  Railways 

About  1850  the  government  decided  to  make  extensive  surveys 
for  a  railway  system  to  be  built  to  the  Pacific  coast.  After  these 
surveys  had  been  made  at  the  expense  of  the  nation,  a  private 
corporation  known  as  the  "Credit  Mobilier"  was  formed  for  the 
purpose  of  privately  controlling  the  vast  system  of  railway  trans- 
portation planned  by  the  government.  The  giving  over  of  these 
rights  to  this  corporation  marks  the  first  widely  known  chapter 
in  the  dark  history  of  American  promotion  and  financing  of 
railways.  The  history  of  this  event  is  recorded  in  two  congres- 
sional reports  of  investigations  covering  more  than  1,300  pages. 
The  first  known  as  "The  Poland  Report"  (report  No.  77  of 
Select  Committee  of  House  of  Representatives  to  investigate 
alleged  "Credit  Mobilier,"  Feb.  18,  1873,  42d  Cong.  2d  Sess.)  ; 
and  the  "Wilson"  report,  No.  78  of  "Select  Committee  of  House 
of  Representatives  to  make  inquiry  of  the  affairs  of  the  Union 
Pacific  Railroad  Co.,  the  Credit  Mobilier  of  America,  etc." 

These  disclose  most  important  facts  relating  to  the  reckless 
manner  in  which  members  of  Congress  were  bribed  or  influenced 
by  promise  of  profit  to  turn  over  the  building  and  ownership  of 
these  lines  to  a  private  corporation.  The  investigation  showed 
that  one  prominent  Congressman  who  afterwards  became  Presi- 
dent of  United  States  and  two  others  who  were  nominated  for 
the  Vice  Presidency  were  implicated  in  the  transactions,  as  well 
as  others.  Time  and  space  do  not  permit  the  recital  of  details, 
and  it  may  be  sufficient  for  the  present  to  quote  briefly  from  the 
conclusions  reached  by  the  investigating  committees  mentioned. 
I  quote  from  the  "Poland"  report : 

"But  such  is  the  tendency  of  the  times,  and  the  belief  is  far 
too  general,  that  all  men  can  be  ruled  by  money,  and  that  the 
use  of  such  means  to  carry  -public  measures  is  legitimate  and 
proper.  In  a  free  government  like  ours  we  cannot  expect 
the  people  will  long  respect  the  laws  if  they  lose  respect  for 
the  lawmakers." 

The  building  of  the  Pacific  railroads  has  passed  into  history, 
leaving  its  dark  blot  on  our  national  escutcheon,  only  to  be 
effaced  as  time  rolls  on,  bringing  with  it  forgetfulness.  The  later 
period,  though  not  so  notably  corrupt  in  its  flagrant  and  open 
bribery  of  government  officials,  has  been  equally  wicked  from 
the  standpoint  of  its  effect  upon  the  economic  welfare  of  our 

[748] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY         237 

people.  One  of  the  outstanding  examples  of  this  period  is  the 
work  of  the  late  E.  H.  Harriman,  who  starting  as  a  small  broker, 
by  the  manipulation  of  money  and  securities,  without  building 
any  roads  or  doing  any  other  constructive  service  to  mankind, 
amassed  a  fortune  estimated  at  about  $250,000,000. 

Such  is  a  brief  review  of  railway  promotion  in  the  earlier 
days.  We  will  now  rapidly  survey  the  methods  used  in  more 
recent  times  by  some  of  the  chief  bankers  and  railway  financiers 
of  America  whose  influence  now  extends  over  the  entire  world  in 
controlling  money,  credit,  and  monopolies  in  all  lines  of  manu- 
facturing and  commerce,  as  well  as  railroads  in  the  United  States. 

Recent  Refined  Methods  of  Railway  Financing  and  Administra- 
tion— History  of  a  Nation's  Shame 

During  the  years  from  1912  to  1915  various  complaints  were 
made  by  shippers  and  the  public  to  Congress  and  the  Interstate 
Commerce  Commission  respecting  certain  illegal  practices  of 
five  important  systems  of  railways  and  their  resulting  inefficiency 
of  service  and  unjust  rates.  Accordingly  the  Interstate  Com- 
merce Commission,  partly  on  its  own  initiative  and  partly  in 
compliance  with  resolutions  of  Congress,  made  investigations, 
and  issued  their  official  reports  of  findings,  in  the  years  1913  to 
1917,  respecting  the  unlawful  practices  and  financial  transactions 
of  five  railway  systems  comprising  approximately  one-third  of 
the  country's  entire  mileage.  The  systems  investigated  by  the 
Interstate  Commerce  Commission  and  reviewed  herein,  are: 

The  New  York,  New  Haven  &  Hartford  Railroad  Co.,  report 
No.  6569;  date  July  11,  1914. 

The  Louisville  &  Nashville  Railroad  Co.,  report  No.  4788; 
date  February  9,  1915. 

The  Chicago,  Rock  Island  &  Pacific  Railroad  Co.,  report  No. 
6384;  date  July  31,  1915. 

The  St.  Louis  &  San  Francisco  Railroad,  report  No.  5933, 
January  20,  1914. 

The  Cincinnati,  Hamilton  &  Dayton  Railroad  Co.,  and  the 
Pere  Marquette  Railroad  Co..  report  No.  6833 ;  date  March  13, 
1917. 

These  investigations  were  made  with  the  most  painstaking 
care  possible,  covering  long  periods  of  time,  in  which  special 
agents  of  the  commission  were  employed  to  secure  information 
and  to  investigate  the  books  and  accounts.    Officers  of  the  com- 

[749] 


238  RAILROAD  LEGISLATION  [Vol.  VIII 

panies  were  summoned  before  the  commission  and  several  thou- 
sand pages  of  testimony  were  taken.  The  findings  of  the  com- 
mission were  published  in  their  official  reports  mentioned,  and 
disclose,  among  others,  the  following  facts : 

The  evidence  secured  by  the  commission  shows  that  every 
railroad  company  investigated  knowingly  falsified  its  accounts, 
partly  in  order  to  hide  expenditures  of  large  sums  for  controlling 
politics  and  elections  and  influencing  legislation  and  the  admin- 
istration of  laws;  falsified  the  accounts  respecting  capital,  ex- 
penses, and  profits,  so  that  the  commission,  in  many  instances, 
was  unable  to  find  for  what  purpose  vast  sums  were  expended; 
and  in  many  cases  the  books  and  accounts  were  burned  by  the 
directors  in  order  to  hide,  in  so  far  as  possible,  various  illegal 
transactions.  Many  of  these  acts  were  done,  as  the  records 
conclusively  show,  by  directors  who  are  well  known  as  among 
the  world's  most  powerful  financiers;  yet  even  though  many 
records  were  willfully  destroyed,  the  commission  was  able  to 
secure  sufficient  evidence  in  many  cases  to  disclose  the  names, 
dates  and  facts. 

In  order  to  place  these  various  illegal  practices  in  systematic 
order  before  you  and  our  people,  to  demonstrate  the  unregu- 
latable  character  of  this  private  control  of  a  natural  monopoly, 
and  to  refer  readily  to  official  evidence  and  the  findings  of  the 
commission,  they  may  be  briefly  classified  as  follows : 

1.  Extravagant  speculations  and  purchases  of  worthless  se- 
curities in  the  interests  of  the  directors;  peculations  from  the 
stockholders'  money  by  illegal  devices,  accompanied  by  the  falsi- 
fying of  books  and  accounts  and  their  later  burning  by  the 
directors. 

2.  Illegally  spending  the  stockholders'  money  and  property  to 
corruptly  influence  politics,  the  press,  and  public  opinion,  and  to 
secure  secrecy  respecting  their  acts. 

3.  Acts  to  secure  a  monopoly  against  the  public  interest  by 
the  violation  of  the  laws  of  many  States  as  well  as  of  the  nation. 

4.  The  organization  by  the  railway  directors  of  "fake"  cor- 
porations, with  "dummy"  officers  to  hide  the  identity  of  real  pro- 
moters, and  shield  them  from  prosecution. 

5.  The  voting  to  themselves  by  the  directors  of  extravagant 
salaries,  in  addition  to  which  large  sums  were  taken  by  some  of 
these  officials  without  warrant  of  law. 

As  the  corrupt  practices,  falsifying  of  records,  etc.,  are  com- 

[750] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY         239 

mon  to  all  the  railroads  investigated,  the  New  Haven  system 
investigation  will  suffice  for  all.  All  the  extracts  from  the  com- 
mission's report  are  taken  verbatim  from  the  records. 

No.  6569. — In  re  Financial  Transactions  of  the  New  York, 
New  Haven  &  Hartford  Railroad  Co.— July  11,  1914. 

"REPORT  OF  THE  COMMISSION  TO  THE  SENATE 
OF  THE  UNITED  STATES 

"By  the  Commission : 

"The  Commission  has  the  honor  to  submit  the  following 
report  in  compliance  with  the  resolution  of  the  Senate  dated 
February  7,  1914: 

"Scope  of  the  Investigation 

"Public  hearings  were  held  extending  over  a  period  of  60 
days  of  almost  continuous  session.  Witnesses  in  a  position 
to  have  knowledge  of  the  transactions  under  scrutiny  were 
examined.  In  the  search  for  truth  the  Commission  had  to 
overcome  many  obstacles,  such  as  the  burning  of  books,  letters, 
and  documents  and  the  obstinancy  of  witnesses  who  declined 
to  testify  until  criminal  proceedings  were  begun  for  their 
refusal  to  answer  questions.  The  New  Haven  system  has 
more  than  300  subsidiary  corporations  in  a  web  of  entangling 
alliances  with  each  other,  many  of  which  are  seemingly 
planned,  created,  and  manipulated  by  lawyers  expressly  re- 
tained for  the  purpose  of  concealment  or  deception. 

"The  result  of  our  research  into  the  financial  workings  of 
the  former  management  of  the  New  Haven  system  has  been  to 
disclose  one  of  the  most  glaring  instances  of  maladministration 
revealed  in  all  the  history  of  American  railroading.  In  the 
course  of  the  investigation  many  instances  were  uncovered 
of  violation  of  the  laws  of  different  States.  As  pointing  to 
violations  of  State  laws,  we  have  turned  over  the  evidence 
concerning  local  occurrences  in  New  York  City  to  the  district 
attorney  for  the  proper  district,  and  the  testimony  relating 
to  irregularities  in  Massachusetts  and  Rhode  Island  have  been 
laid  before  the  proper  authorities  of  those  States.  The  Com- 
mission has  also  furnished  the  Department  of  Justice  with 
a  complete  record  of  the  testimony. 

"The  difficulties  under  which  this  railroad  system  has  labored 
in  the  past  are  internal  and  wholly  due  to  its  own  mismanage- 

[751] 


240  RAILROAD  LEGISLATION  [Vol.  VIII 

ment.  Its  troubles  have  not  arisen  because  of  regulation  by 
governmental  authority.  Its  greatest  losses  and  most  costly 
blunders  were  made  in  attempting  to  circumvent  governmental 
regulation  and  to  extend  its  domination  beyond  tlv1  limits  fixed 
by  law. 

"The  subject  matter  of  this  inquiry  relates  to  the  financial 
operation  of  a  railroad  system  which,  on  June  30,  1903,  had  a 
total  capitalization  of  approximately  $93,000,000,  of  which 
$79,000,000  was  stock  and  $14,000,000  bonds.  In  the  10  years 
from  June  30,  1903,  this  capitalization  was  increased  from 
$93,000,000  to  $417,000,000,  exclusive  of  stock  premiums,  or 
an  increase  of  $324,000,000.  Of  this  increase  approximately 
$120,000,000  was  devoted  to  its  railroad  property  and  was 
expended  for  betterments  and  equipment.  This  leaves  the 
sum  of  $204,000,000,  which  was  expended  for  operations 
outside  of  its  railroad  sphere.  Through  the  expenditure  of 
this  sum  this  railroad  system  has  practically  monopolized  the 
freight  and  passenger  business  in  five  of  the  States  of  the 
Union.  It  has  acquired  a  monopoly  of  competing  steamship 
lines  and  trolley  systems  in  the  section  which  it  serves.  The 
financial  operations  necessary  for  these  acquisitions,  and  the 
losses  which  they  have  entailed,  have  been  skillfully  concealed 
by  the  juggling  of  money  and  securities  from  one  subsidiary 
corporation  to  another. 

"Significant  Incidents 
"Marked  features  and  significant  incidents  in  the  loose, 
extravagant,  and  improvident  administration  of  the  finances 
of  the  New  Haven  as  shown  in  this  investigation  are  the 
Boston  &  Maine  despoilment ;  the  iniquity  of  the  Westchester 
acquisition;  the  double  price  paid  for  the  Rhode  Island  trol- 
leys; the  recklessness  in  the  purchase  of  Connecticut  and 
Massachusetts  trolleys  at  prices  exorbitantly  in  excess  of  their 
market  value ;  the  unwarranted  expenditure  of  large  amounts 
in  'educating  public  opinion' ;  the  disposition,  without  knowl- 
edge of  the  directors,  of  hundreds  of  thousands  of  dollars  for 
influencing  public  sentiment;  the  habitual  payment  of  un- 
itemized  vouchers  without  any  clear  specification  of  details; 
the  confusing  interrelation  of  the  principal  company  and  its 
subsidiaries  and  consequent  compilation  of  accounts ;  the  prac- 
tice of  financial  legerdemain  in  issuing  large  blocks  of  New 

[7S2] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY  241 

Haven  stock  for  notes  of  the  New  England  Navigation  Co., 
and  manipulating  these  securities  back  and  forth ;  fictitious 
sales  of  New  Haven  stock  to  friendly  parties  with  the  design 
of  boosting  the  stock  and  unloading  on  the  public  at  the  higher 
'market  price' ;  the  unlawful  diversion  of  corporate  funds  to 
political  organizations;  the  scattering  of  retainers  to  attorneys 
of  five  States,  who  rendered  no  itemized  bills  for  services  and 
who  conducted  no  litigation  to  which  the  railroad  was  a  party ; 
extensive  use  of  a  paid  lobby  in  matters  as  to  which  the 
directors  claim  to  have  no  information ;  the  attempt  to  conceal 
utterances  of  the  press  by  subsidizing  reporters;  payment  of 
money  and  the  profligate  issue  of  free  passes  to  legislators 
and  their  friends;  the  investment  of  $400,000  in  securities  of 
a  New  England  newspaper ;  the  regular  employment  of  politi- 
cal bosses  in  Rhode  Island  and  other  States,  not  for  the  pur- 
pose of  having  them  perform  any  service  but  to  prevent  them, 
as  Mr.  Mellen  expressed  it,  from  'becoming  active  on  the  other 
side' ;  the  retention  by  John  L.  Billard  of  more  than  $2,700,000 
in  a  transaction  in  which  he  represented  the  New  Haven  and 
into  which  he  invested  not  a  dollar;  the  inability  of  Oakleigh 
Thorne  to  account  for  $1,032,000  of  the  funds  of  the  New 
Haven  intrusted  to  him  in  carrying  out  the  Westchester 
proposition ;  the  story  of  Mr.  Mellen  as  to  the  distribution  of 
$1,200,000  for  the  corrupt  purposes  in  bringing  about  amend- 
ments of  the  Westchester  and  Port  Chester  franchises ;  the 
domination  of  all  the  affairs  of  this  railroad  by  Mr.  Morgan 
and  Mr.  Mellen  and  the  absolute  subordination  of  other  mem- 
bers of  the  board  of  directors  to  the  will  of  these  two;  the 
unwarranted  increase  of  the  New  Haven  liabilities  from 
$93,000,000  in  1903  to  $417,000,000  in  1913;  the  increase  in 
floating  notes  from  nothing  in  1903  to  approximately 
$40,000,000  in  1913;  the  indefensible  standard  of  business 
ethics  and  the  absence  of  financial  acumen  displayed  by  emi- 
nent financiers  in  directing  the  destinies  of  this  railroad  in  its 
attempt  to  establish  a  monopoly  of  the  transportation  of  New 
England.  A  combination  of  all  these  has  resulted  in  the 
present  deplorable  situation  in  which  the  affairs  of  this  railway 
are  involved." 

Pages  35  to  41  of  the  report  give  a  history  of  the  celebrated 
transaction  in  which  18  miles  of  railroad  in  which  Directors  J. 
P.  Morgan,  Sr.,  William  Rockefeller,  and  some  promoters  who 

[753] 


242  RAILROAD  LEGISLATION  [Vol.  VIII 

were  their  friends,  were  interested,  was  unloaded  by  them  on 
the  railroad  company  at  a  meeting  kept  secret  from  the  rest  of 
the  board  of  directors,  at  which  meeting  President  Mellen  pre- 
sided. This  property  proved  to  be  more  than  worthless  to  the 
stockholders,  having  been  operated  at  an  annual  loss  of  over 
$1,000,000  annually,  and  for  which  their  directors  forced  them 
to  pay  the  vast  sum  of  $36,434,173.25. 

The  principal  accounts  respecting  this  transaction  were  kept 
in  the  office  of  J.  P.  Morgan  &  Co.,  in  such  a  manner  as  to 
hide  the  purposes  for  which  moneys  were  received  or  expended, 
under  the  title  of  "Special  Account  No.  2."  Part  of  the  accounts 
were  kept  by  another  banker  interested  in  the  transaction  named 
Oakleigh  Thorne,  respecting  whom  the  commission  report  says : 

"It  appeared  during  the  progress  of  this  investigation  that 
the  personal  records  of  Thorne  which  might  have  shown  all  the 
details  of  these  disbursements  had  been  burned  by  him  in 
January,  1912." 

This  transaction  is  all  the  more  sensational  since  Mr.  Mellen. 
"president"  of  the  road,  was  not  permitted  by  the  directors  who 
robbed  it  to  the  extent  of  millions  of  dollars,  to  know  who  got 
the  money,  or,  as  he  personally  wrote  in  the  records,  when 
smarting  from  the  rebuffs  of  Mr.  Morgan :  "It  seems  that  as 
president  of  the  road,  I  should  be  entitled  to  know  who  got  the 
money  for  the  truck  turned  over.    C.  S.  M." 

The  New  York,  Westchester  &  Boston  Raihvay  Co. 
The  following  is  from  the  report : 

"The  enormous  sum  of  $36,434,173.25  was  expended  for  a 
road  only  18.03  miles  in  extent,  which  is  being  operated  at  an 
annual  loss  of  approximately  $1,250,000,  and  which  will  have 
to  increase  its  earnings  four  and  one-half  fold  before  it  can 
pay  its  operating  expenses  Tind  fixed  charges.  It  is  incon- 
ceivable that  this  enterprise  could  have  been  entered  into  by 
the  New  Haven  as  a  result  of  the  mandates  of  good  judgment 
and  proper  railroading. 

"The  Westchester  acquisition  was  planned  and  executed  by 
a  special  committee  of  the  board,  consisting  of  directors  Mor- 
gan, Rockefeller,  and  Miller,  with  President  Mellen  as  chair- 
man. The  vote  appointing  this  committee  'on  proposed  com- 
petition between  the  Connecticut  State  line  and  Harlem  River, 
with  power,'  does  not  disclose  an  intention  to  authorize  the 

[754] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY         243 

buying  of  charters  and  promotion  securities  and  the  building  of 
a  new  railroad,  much  less  one  at  a  cost  of  $36,000,000.  It  is 
ambiguous  and  was  evidently  intended  to  conceal  a  secret 
purpose.  The  full  board  was  not  taken  into  the  confidence 
of  those  directors  who  wanted  these  securities  purchased,  and 
no  report  was  ever  made  by  this  committee  placing  the  situa- 
tion as  they  found  it  before  the  board. 

*         *         * 

"The  report  of  this  committee,  however,  was  unanimously 
'approved,  ratified  and  confirmed'  at  the  meeting  of  the  board 
of  November  8,  1907,  at  which  the  following  directors  were 
present :  Mellen,  Rockefeller,  Morgan,  Milner,  Thayer, 
Brooker,  Brush,  Warner,  Cheney,  Miller,  Skinner,  Barney, 
Taft,  Whittemore,  Elton,  Hemingway,  Robertson,  Robbins, 
and  Parker. 

"After  this  meeting  of  the  board  at  which  this  undetailed 
report  was  ratified,  Mr.  Mellen  went  to  see  Mr.  Morgan,  and 
requested  more  information  as  to  the  expenditure  of  the 
amounts.  According  to  Mr.  Mellen's  evidence,  Mr.  Morgan 
asked  him  if  he  knew  who  wrote  the  report,  and  upon  Mr. 
Mellen's  reply,  'Yes ;  Mr.  Stetson  wrote  it,'  Mr.  Morgan  asked 
him,  'Do  you  think  you  know  more  than  Mr.  Stetson?'  Mr. 
Mellen  admitted  he  did  not,  and  apparently  acquiesced,  but 
took  the  precaution  to  write  upon  the  back  of  his  report,  while 
still  smarting  under  the  humiliation  of  the  interview  with  Mr. 
Morgan,  the  following  words: 

"  'The  trouble  with  this  is  there  is  nothing  to  show  who  got 
the  money  for  the  truck  turned  over.  I  don't  like  the  looks  of 
it,  but  I  don't  see  why  the  matter  should  not  be  made  plain. 
If  I  had  the  stock  and  sold  it,  I  should  expect  others  would 
state  they  bought  it  of  me;  but  that  don't  seem  to  have  been 
the  disposition  here.  I  never  have  known  the  first  thing  about 
who  originally  held  the  securities,  what  they  were  sold  for; 
and  no  one  thought  that  I  was  entitled  to  know.  Perhaps  I 
am  not.  I  would  feel  better  if  there  were  at  least  a  disposition 
to  let  me  know  something  more  than  appears  in  the  record. 

"'(Signed)     C.  S.  M.'" 


[755] 


244  RAILROAD  LEGISLATION  [Vol.  VIII 

Dummy  Companies  Formed  to  Hide  the  Identity  of  Railroad 
Officials  as  to  Their  Complicity  in  Illegal  Acts  and  Frauds 

on  the  Stockholders 
The  following  is  from  pages  45,  60  and  61  of  the  official  report : 

"Dummy  Companies" 
"The  frequency  with  which  dummy  corporations  and  dummy 
directors  appear  in  this  record  leads  to  the  conclusion  that 
some  one  high  in  the  counsels  of  the  New  Haven  had  an  obses- 
sion upon  the  subject  of  the  utility  of  such  sham  methods.  The 
directors  of  the  Billard  Company  confessed  that  they  were 
dummies  and  knew  nothing  of  its  operations.  Why  men  of 
respectability  and  standing  as  these  appear  to  be  should  lend 
their  names  as  dummies  passes  comprehension. 

"In  the  organization  of  one  of  the  steamship  companies  the 
young  lady  stenographer  was  made  president ;  and  a  youth  of 
21  years  of  age  by  the  name  of  Grover  Cleveland  Richards  was 
selected  as  treasurer  of  another  company. 

"Clerks  and  irresponsible  persons  were  drawn  upon  to  sup- 
ply the  demand  for  dummies  in  the  financial  joy  rides  by  the 
management  of  the  Netv  Haven. 

"Mellen's  stock  in  the  New  England  Investment  &  Securi- 
ties Co.  was  held  by  James  B.  Brady,  who  testified  that  he  was 
merely  a  dummy  for  Mr.  Mellen.  Director  Skinner's  stock 
in  this  same  company  was  held  by  a  relative  and  a  bookkeeper 
in  his  office.  Thus,  throughout  the  entire  story  of  deception, 
the  New  Haven  management  vainly  endeavored  to  hide  the 
true  facts  behind  these  dummy  individuals  and  dummy  cor- 
porations. 

"As  a  matter  of  law,  such  devices  are  feeble  and  puerile, 
but  if  the  master  financiers  behind  these  New  Haven  transac- 
tions could  use  these  sham  methods  and  thus  give  their  in- 
dorsement to  the  availability  of  such  crooked  schemes  to  cover 
the  true  substance  and  fact  of  financial  transactions  it  indi- 
cates a  low  state  of  financial  morality.  No  condemnation  can 
be  too  severe  to  apply  to  the  frequent  use  of  these  companies 
by  the  New  Haven." 

The  methods  used  by  this  railroad  company,  the  evils  result- 
ing therefrom,  are  summarized  by  the  Interstate  Commerce  Com- 
mission in  their  report  from  which  the  following  quotations  are 
made : 

[756] 


No.  4 J    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY         245 

"Evil  of  Interlocking  Directorates 
"A  system  of  interlocking  directorates  has  grown  up  and 
flourished  in  the  past  few  years  which  has  brought  about  com- 
binations and  intercorporate  relationships  not  conducive  to  the 
public  welfare.  On  the  New  Haven  board  of  directors  there 
was  a  representative  of  the  Pennsylvania  Railroad,  which  rail- 
road owned  35,000  shares  of  New  Haven  stock ;  there  was  a  rep- 
resentative of  the  New  York  Central,  which  owned  35,000  shares; 
there  was  a  representative  of  insurance  interests  that  owned 
35,000  shares,  and  a  representative  of  an  express  company  that 
had  a  contract  with  the  railroad ;  there  were  directors  who  were 
also  directors  of  the  Standard  Oil  Company,  the  United  Steel 
Corporation,  the  Pullman  Company ;  in  fact,  every  other  interest 
seemed  better  represented  on  the  New  Haven  board  than  the 
average  stockholder's  interest. 

"There  are  too  many  ornamental  directors  and  too  many  who 
have  such  childlike  faith  in  the  man  at  the  head  that  they  are 
ready  to  indorse  or  approve  anything  he  may  do. 

"The  handling  of  bank  deposits  and  security  sales  of  these 
corporations  are  massed  in  a  few  hands,  carrying  with  them  a 
power  and  domination  over  large  amounts  of  banking  capital  as 
well  as  the  control  of  great  railroad  systems.  These  and  other 
evils  as  the  result  of  interlocking  directorates  are  now  well  recog- 
nized and  known,  and  they  have  been  emphasized  by  the  disclos- 
ures of  this  investigation. 

New  Haven  Monopoly  Corrupt 

"This  investigation  has  demonstrated  that  the  monopoly  theory 
of  those  controlling  the  New  Haven  was  unsound  and  mischiev- 
ous in  its  effects.  To  achieve  such  monopoly  meant  the  reckless 
and  scandalous  expenditure  of  money;  it  meant  the  attempt  to 
control  public  opinion;  corruption  of  government;  the  attempt 
to  pervert  the  political  and  economical  instincts  of  the  people 
in  insolent  defiance  of  law.  Through  exposure  of  the  methods  of 
this  monopoly  the  invisible  government  which  has  gone  far  in  its 
effort  to  dominate  New  England  has  been  made  visible.  It  has 
been  clearly  proven  how  public  opinion  was  distorted ;  how  of- 
ficials who  were  needed  and  who  could  be  bought  were  bought; 
how  newspapers  that  could  be  subsidized  were  subsidized ;  how  a 
college  professor  and  publicists  secretly  accepted  money  from  the 
New  Haven  while  masking  as  a  representative  of  a  great  Ameri- 

[757] 


246  RAILROAD  LEGISLATION  [Vol.  VIII 

can  university  and  as  the  guardians  of  the  interests  of  the  people ; 
how  agencies  of  information  to  the  public  were  prostituted  where- 
ever  they  could  be  prostituted  in  order  to  carry  out  a  scheme  of 
private  transportation  monopoly  imperial  in  its  scope. 

Directors  Criminally  Negligent 

"It  is  inconceivable  that  these  wrongs  could  have  gone  on  with- 
out interference  if  the  members  of  the  board  of  directors  had 
been  true  to  the  faith  they  owed  the  stockholders.  A  number 
of  directors  appear  in  many  instances  to  have  voted  without 
knowledge  and  to  have  approved  the  expenditure  of  many  mil- 
lions without  information.  According  to  the  testimony  of  some 
of  the  directors  they  merely  approved  what  had  been  done  by 
some  committee  or  by  some  officer  of  the  company.  The  direc- 
tors' minutes  reveal  that  it  was  largely  a  body  for  ratification  and 
not  authorization,  as  the  law  intended  a  board  of  directors  should 
be.  None  of  the  directors  would  have  been  so  careless  in  the 
handling  of  his  own  money  as  the  evidence  demonstrated  they 
were  in  dealing  with  the  money  of  other  people.  The  directors 
actively  or  passively  acquiesced  in  the  efforts  of  the  Mellen-Mor- 
gan-Rockefeller  regime  to  extend  the  domination  of  this  corpora- 
tion over  the  whole  transportation  field  in  New  England. 

"If  these  directors  who  were  faithless  to  their  stewardship 
were  held  responsible  in  the  courts  and  at  the  bar  of  public 
opinion  for  the  failure  to  do  those  things  they  should  have  done, 
the  lesson  to  directors  who  do  not  direct  would  be  very  salutary. 

"Directors  should  be  made  individually  liable  to  civil  and  crimi- 
nal laws  for  the  manner  in  which  they  discharge  their  trust.  A 
corporation  can  be  no  better  or  worse  than  those  who  operate 
it.  It  should  be  just  as  grave  a  crime  to  plunder  stockholders  or 
the  public  through  a  railroad  corporation  as  it  is  to  personally 
rob  an  individual. 

Subsidiary  Corporation  Condemned 

"It  was  found  in  the  investigation  of  the  New  Haven  system 
that  there  were  336  subsidiary  corporations,  and  the  books  of  the 
New  Haven  road  proper  reflect  only  a  small  part  of  the  actual 
financial  transactions  of  the  railroad.  Many  of  these  subsidiary 
corporations  served  no  purpose  save  an  evil  one.  They  were  used 
to  cover  up  transactions  that  would  not  bear  scrutiny,  and  to  keep 
from  the  eyes  of  public  officials  matters  that  were  sought  to  be 

[758] 


No.  4]    RELATION  OF  PUBLIC  OWNERSHIP  TO  DEMOCRACY         247 

kept  secret.  The  commission  should  have  the  power  to  examine, 
not  only  the  books,  records,  papers  and  correspondence  of  inter- 
state carriers,  but  of  subsidiary  companiec  as  well. 

Remedy  in  Public  Conscience  and  Lazvs 

"The  insuring  of  honesty  throughout  the  management  of  the 
great  railroads  of  the  country  is  a  most  important  question  be- 
fore the  people  today,  and  only  when  through  exposure  of  wrong- 
doing and  an  awakened  public  conscience,  coupled  with  effective 
laws,  this  result  is  produced,  may  railroading  be  placed  upon  the 
high  level  that  it  should  occupy.  The  revelations  in  this  record 
make  it  essential  for  the  welfare  of  the  nation  that  the  reckless 
and  profligate  financiering  which  has  blighted  this  railroad  system 
be  ended,  and  until  this  is  fully  done  there  will  be  no  assurance 
that  the  story  of  the  New  Haven  will  not  be  told  again  with  the 
stockholders  of  some  other  railroad  system  as  the  victims." 

Government  ownership  of  our  railways  is  desirable;  it  is  prac- 
ticable ;  and  it  is  the  only  democratic  and  just  solution  of  the 
railway  problem,  the  great  emergency  of  American  reconstruc- 
tion. 

Please  allow  me  in  closing  to  quote  from  the  statement  I  sub- 
mitted last  February  before  the  Senate  Committee  on  Interstate 
Commerce : 

"If  the  ideals  which  we  are  seeking  prevail,  service,  not  profit — 
democracy,  not  autocracy,  will  rule.  What  we  sow  today  we  shall 
reap  tomorrow.  We  look  forward  to  the  time,  which  we  hope 
may  be  in  the  near  future,  when  through  the  patriotism  of  our 
citizens  and  the  continuing  heroism  of  our  soldiers,  the  victory 
which  has  come  to  our  arms  will  here  at  home  consummate  an 
industrial  peace  that  shall  be  wise  and  just  to  all,  as  one  of  the 
first  fruits  of  the  great  sacrifice  America  has  made  in  this  world 
struggle.  Among  the  fruits  of  such  peace,  those  who  believe  in 
equality  of  opportunity,  civil  liberty  and  democracy,  hold  as 
highly  essential  the  public  ownership  and  operation  of  our  rail- 
roads, our  public  utilities,  and  our  natural  resources,  for  in  this 
way  alone  can  control  be  'of  the  people,  by  the  people,  and  for  the 
people.'  " 


[759} 


GOVERNMENT  OWNERSHIP  THE   ONLY   SOLUTION 

W.  P.  BOLAND. 
Scranton,  Pennsylvania 

AFTER  having  heard  many  diverse  views  on  the  railroad 
situation  I  realize  more  than  ever  the  need  for  positive 
action  with  respect  tc  our  great  transportation  lines.  It 
is  the  greatest  problem  now  before  the  people  of  the  Nation 
and  will,  I  believe,  become  one  of  the  leading,  if  not  the  central 
element  in  the  national  campaign  soon  to  engage  the  attention 
of  the  country.  We  must  approach  this  proposition  in  a  definite 
way.  It  is  a  business  matter,  entirely  understandable  and  abso- 
lutely within  the  compass  of  the  universally  recognized  principles 
of  commerce  and  trade.  We  are  not  dealing  with  a  mysterious 
or  even  uncertain  situation.  Direct  and  positive  action,  taken  by 
men  whose  training  and  business  capacity  fit  them  for  such 
work,  will  solve  the  railroad  problem  to  the  advantage  of  the 
people  of  the  United  States  by  making  the  railroad  the  servant 
of  the  people,  rather  than  subject  the  Government  to  the  service 
of  the  agencies  owning  the  railroads. 

The  time  has  arrived  for  us  to  correct  the  abuses,  now  and  for 
some  time  manifest  in  the  railroad  service  of  the  United  States. 
The  railroad  system  of  to-day  is  approximately  the  collective 
result  of  all  the  work  performed  in  this  connection  since  the  first 
railroad  train  was  moved  in  this  country.  The  men  who  formed 
these  different  branches  of  railroads  now  practically  merged,  in 
a  physical  sense,  into  one  great  railroad  system,  had  but  limited 
capital.  Their  energies  made  the  present  system  possible  and  in 
eliminating  many  of  these  men  from  our  railroad  service  unfair 
treatment  was  accorded  them. 

People's  Interests  Paramount 
We  have  the  railroad  system.  Let  us  work  now  for  the  gen- 
eral welfare  of  the  people  of  the  Nation.  The  proposition  is  too 
big  to  be  successfully  handled  by  any  group  or  groups  of  private 
capitalists.  It  is  Nation-wide  in  scope,  requirements  and  service, 
and  no  agency  but  the  National  Government  itself  can  hope 
successfully  to  meet  this  railroad  emergency  and  do  justice  to  the 
people. 

[760] 


No.  4]       GOVERNMENT  OWNERSHIP  THE  ONLY  SOLUTION  249 

There  are  so  many  conditions  associated  with  the  railroad  situa- 
tion that  one  agency  in  which  the  people  have  absolute  confidence 
must  take  charge.  That  agency  is  the  Government.  Take  for 
instance  two  railroads  entering  New  York — the  Lackawanna  and 
the  Erie.  The  Lackawanna  operates  about  985  miles  and  the 
Erie  operates  2,465  miles.  It  is  fair  to  assume  that  there  is  two 
and  one-half  times  the  population  tributary  to  the  Erie  and  de- 
pending upon  that  road  for  service  that  there  is  to  the  Lacka- 
wanna. These  people  will  in  the  very  nature  of  things  be  the 
innocent  sufferers  of  any  evil  results  which  may  follow  the 
manipulation  of  the  affairs  of  either  road. 

You  and  I  may  be  living  in  Elmira,  N.  Y.  We  may  be  build- 
ing automobiles  and  want  to  sell  our  product  to  the  people  of 
Scranton  or  New  York.  We  apply  to  the  Interstate  Commerce 
Commission  for  a  rate  and  the  first  thing  the  members  or  agents 
of  the  Commission  look  at  is  the  fixed  charges  of  the  company 
and  then  a  reasonable  return  on  the  service  rendered.  Both 
roads  parallel  in  the  district  I  refer  to.  The  construction  cost  is 
about  the  same,  the  equipment  the  same,  but  you  will  find  in  1916 
an  interest  charge  against  the  Erie  of  $4,699  a  mile,  and  you  will 
find  an  interest  charge  against  the  Lackawanna  of  but  $7  a  mile. 

Cannot  Compete 

How  can  the  Erie,  with  its  interest  charges  nearly  700  times 
as  great  as  the  Lackawanna's,  meet  the  competition  of  the  better 
financed  road?  Is  there  an  agency  in  this  country  today  which 
can  solve  this  unfortunate  railroad  problem  but  the  Government? 
I  am  giving  you  now  a  sample  of  railroad  financial  divergence 
which  has  duplicates  in  all  parts  of  the  country.  It  was  contribu- 
tory negligence  on  the  part  of  the  Government  to  allow  these 
things  to  exist  and  have  the  railroads  of  the  Nation  made  the 
plaything  of  a  gambling  Wall  Street  to  the  great  prejudice  of  the 
business  interests  of  the  Nation  and  the  people  of  the  country 
generally. 

You  cannot  reduce  wages  on  the  Erie  sufficiently  to  meet 
Lackawanna  competition;  and  materials  and  operating  expenses 
on  both  roads  must  remain  approximately  at  the  same  figure. 
Because  of  these  conditions  you  put  a  charge  on  the  shipper  that 
forces  him  out  of  business  and  you  penalize  all  the  people.  This 
condition  must  be  met  by  Government  ownership  and  proper 
regulation  of  rates  and  charges. 

[761] 


250  RAILROAD  LEGISLATION  [Vol.  Vffl 

The  interest  of  the  people — the  Government — are  always  para- 
mount. When  liquor  men  abused  the  rights  conferred  upon  them 
by  the  government,  licenses  and  privileges  were  revoked.  The 
railroads  violated  their  charter  rights,  inflated  their  capital  and 
otherwise  heaped  fraudulent  burdens  upon  the  people  and  forced 
the  Government  to  take  them  over.  The  Government  is  not 
taking  this  property  without  compensation,  but  these  manipulators 
of  railroad  properties  insist  on  having  the  valuation  fixed  at  the 
amount  of  these  inflated  values  or  higher. 

Capitalisation  Comparisons 

We  know  that  the  Erie  has  a  capitalization  of  $182,240  a  mile 
and  the  Lackawanna  a  capitalization  of  about  $42,000  a  mile  and 
the  Great  Northern  about  $42,000  a  mile.  There  is  no  establish- 
ment on  earth  able  to  handle  such  a  widely  diverging  transporta- 
tion problem  but  the  Government. 

The  Government  must  handle  this  situation — readjust  charges 
on  an  honest  basis  and  wipe  out  useless  and  ruinous  railroad 
competition.  Where  five  railroads  extend  from  Chicago  to  St. 
Louis  two  might  do  the  work,  with  increased  equipment, 
dividing  that  now  in  use  by  the  additional  three  roads  and 
the  waste  in  superfluous  management  and  other  such  charges 
eliminated.  Under  such  conditions  rates  could  be  reduced  and 
wages  increased,  allowing  a  fair  return  to  every  honest  in- 
vestor or  making  the  Government  returns  with  Federal  owner- 
ship in  effect  entirely  secure. 

The  Lehigh  Valley  parallels  the  Central  Railroad  of  New  Jer- 
sey from  Wilkes-Barre  to  Bethlehem  and  then  both  roads  use 
the  Reading  tracks  to  Philadelphia.  We  should  eliminate  two  of 
these  roads,  divide  the  equipment  and  cut  down  unnecessary  over- 
head charges.  Agencies  interested  in  this  needless  competition, 
bankers,  money  lenders,  mo«ey  gamblers,  some  lawyers  and 
others,  are  the  elements  responsible  for  this  condition.  They 
made  the  railroads  a  means  to  improper  ends  to  the  prejudice 
of  the  people  of  the  country.  This  manipulation  and  juggling  of 
great  transportation  properties,  with  the  business  disturbance  and 
cost  to  the  people,  was  and  is  the  great  crime  of  this  Nation  and 
is  responsible  for  much  of  the  present  industrial  unrest  and  com- 
mercial instability. 

Under  the  so-called  Government  control  of  railroad  properties 
nothing  has  been  more  palpable  than  the  efforts  of  those  in  charge 
of  the  roads  to  so  befuddle  the  situation  as  to  discredit  Govern- 

[762] 


No.  4]       GOVERNMENT  OWNERSHIP  THE  ONLY  SOLUTION  251 

merit  participation  in  this  work.  There  is  a  persistent  effort  under 
way  all  of  the  time  thus  to  force  these  roads  back  into  private 
hands.  The  present  is  no  sample  of  the  kind  of  service  which 
would  follow  Federal  ownership.  Competent  men  would  be  put 
in  charge.  We  are  a  business  people  and  can  handle  our  rail- 
roads. In  fact  the  same  practical  men  who  handled  these  roads 
for  the  private  owners  could  do  similar  work  for  the  people,  but 
along  more  efficient  lines,  under  Government  ownership. 

Government  ownership  of  all  public  utilities  is  coming.  Sin- 
ister agencies  may  through  fraud,  trickery  and  artifice  delay  it, 
but  it  is  the  logical  way  to  handle  our  transportation  problem  and 
it  will  come. 


[763] 


NATIONALIZING   THE   RAILROADS 

Consolidation  Accomplished,  Competition  Ends,  and  With  it 

Private  Ownership 

CALVIN  TOMKINS 

Ex-Member  Inland  Waterways   Committee,   National 
Railroad  Administration 

MUCH  has  been  written  about  the  desirability  of  private 
versus  public  ownership  and  operation  of  the  railroads, 
but  there  has  been  little  discussion  of  what  may  be 
termed  the  natural  history  of  railway  development  and  its  neces- 
sary consequence ;  viz.,  the  nationalization  and  unification  of  the 
entire  transportation  system  of  the  country. 
•  For  more  than  a  year  there  has  been  a  continuous  search  for 
an  acceptable  way  to  return  the  roads  to  their  former  owners, 
but  no  way  of  doing  so  has  thus  far  been  found.  It  is  time  to  ask 
whether  force  of  circumstances  may  not  compel  us  to  nationalize 
as  other  nations  have  done  in  spite  of  a  popular  wish  not  to  do  so, 
and  in  spite  of  temporary  makeshifts  like  government  guarantees 
of  profits  and  like  the  pending  Senate  and  House  bills,  which, 
while  pretending  to  return  the  roads  to  private  ownership,  in 
reality  only  make  the  gesture  of  doing  so. 

The  railroads  of  the  country  were  developed  by  its  most  ex- 
perienced minds  through  a  process  of  intense  competition  which 
consciously  had  one  end  in  view ;  viz.,  the  consolidation  of  many 
roads  into  a  few  systems.  For  fifty  years  progress  was  made  in 
this  direction — and  unconscious  progress  toward  one  system.  We 
have  reached  the  conclusion  of  this  process  of  natural  selection 
under  government  auspices,  because  the  war  precipitated  that  re- 
sult, which  was  inevitable  in  any  event. 

Prior  to  the  war,  the  Sherman  Law,  which  was  intended  to 
prevent  the  consolidation  of  systems,  operated  to  promote  their 
bankruptcy,  because  of  a  policy  of  starvation  which  increased 
expenses  without  permitting  a  corresponding  increase  of  revenue. 
This  accelerated  absorption  of  the  weaker  by  the  stronger  roads. 
The  war  demonstrated  the  defects  of  the  Sherman  Law  which 
was  scrapped  in  1917,  and  the  railroads  placed  under  one  federal 
control  for  war  purposes. 

[764] 


No.  4]  NATIONALIZING  THE  RAILROADS  253 

From  the  beginning,  the  railroad  history  of  the  country  has 
been  a  record  of  exploitations,  absorptions,  expansion  and  bank- 
ruptcies, and  then  the  same  processes  repeated  over  and  over 
again,  the  units  being  larger  each  time.  It  was  the  lack  of  guar- 
antees and  the  risks  incurred  which  made  railroad  service  in  the 
United  States  so  cheap  at  the  expense  of  the  investor.  The  sys- 
tems were  in  truth  gradually  consolidating  themselves  under  a 
regime  of  most  intensive  competition.  The  law  of  natural  selec- 
tion, operating  freely,  brought  to  the  front  the  kind  of  men  who 
developed  our  railroads  and  attained  such  remarkable  results  in 
so  short  a  time,  culminating  in  the  greatest  railroad  system  of 
the  world. 

The  competitive  conditions  which  produced  men  like  Vander- 
bilt,  Huntington,  Hill  and  Harriman,  admittedly  no  longer  exist. 
How  then  is  it  possible  to  reinstate  competitive  railroad  organiza- 
tion? Are  not  the  proposed  "  regional  systems,"  to  be  equipped 
with  "  regional  directors,"  in  supposed  "  competition  "  with  each 
other,  merely  camouflaged  semblances  of  the  older  order  of  real 
things  which  has  passed  away  ?  Are  not  the  proposed  "  zones  " 
comparable  to  the  several  floors  of  a  single  department  store,  each 
with  its  respective  floor  manager  in  charge?  Is  not  all  this  ma- 
chinery a  mere  pretense  which  may  obstruct  rather  than  facilitate 
the  operation  of  a  national  system  already  unified  ? 

The  government,  by  general  consent,  determines  freight  rates, 
wages,  hours,  schedules,  routing,  joint  operation  of  terminals 
equipment  and  ticket  offices,  safety  devices,  issue  of  securities, 
uniform  accounting,  and,  most  important  of  all,  credit — and  there 
is  general  agreement  that  these  governmental  powers  should  be 
perpetuated.  It  is  also  cooperatively  developing  water  transpor- 
tation. Aside  from  the  purchase  of  supplies  (a  most  dangerous 
function  under  a  government  guarantee  of  profit),  what  is  there 
which  can  be  delegated  to  private  initiative?  The  genius  of  the 
old  time  leaders  was  not  exercised  under  such  conditions.  The 
objective  for  which  they  consciously  and  unconsciously  competed 
has  been  achieved,  and  it  follows  that  railroad  competition  is  now 
as  much  a  thing  of  the  past  as  they  are. 

Private  competition,  having  achieved  consolidation  and  admin- 
istrative unity,  the  old  order  naturally  ends  in  monopoly  either 
public  or  private,  which  is  without  initiative  except  as  it  shall  be 
motivated  by  the  government.  Is  it  not  then  reasonable  to  an- 
ticipate the  nationalization  of  the  railways  of  the  country  as  a 

[765] 


254  RAILROAD  LEGISLATION  [Vol.  VIII 

single  administrative  unit  without  prospective  profit  for  anyone, 
and  for  the  sole  purpose  of  providing  public  transportation? 

In  truth,  the  present  issue  really  is: — How  can  we  substitute 
for  the  existing  system  of  mixed  government  and  private  con- 
trol without  responsibility,  a  genuine  policy  of  responsible  gov- 
ernment ownership  and  operation?  In  short,  how  shall  the  old 
owners  be  bought  out  and  the  new  machinery  set  up? 

All  of  the  suggestions  which  have  been  made  for  a  return 
of  the  properties  to  their  owners  contemplate  a  government 
guarantee  of  freight  rates  sufficiently  high  to  provide  for  interest, 
dividends  and  the  attraction  of  new  capital.  In  other  words,  the 
demand  is  for  a  prospective  private-service  profit  with  a  govern- 
ment guarantee  behind  it;  and  this  in  spite  of  the  fact  that  real 
competition  which  should  be  the  quid  pro  quo  for  such  a  bargain 
no  longer  exists  and  cannot  be  resuscitated. 

Since,  as  already  noted,  the  government  is  to  permanently 
assume  the  essential  attributes  of  ownership,  it  follows  that  if 
the  properties  shall  be  returned  to  their  former  owners  for  op- 
eration, a  guarantee  of  profits  must  be  assured  before  resump- 
tion of  functions  can  safely  be  undertaken  by  them.  This  will  be 
necessary  since  they  are  to  take  orders  from  the  government 
as  to  how  they  shall  operate,  what  they  shall  get  and  what  they 
shall  give — except  as  such  instructions  may  be  modified  by  their 
power  to  influence  the  government  and  by  the  power  of  organ- 
ized labor  and  public  opinion  to  influence  both  them  and  the 
government.  In  all  essentials  they  will  be  "  dummy  "  operators 
without  responsibility  but  assured  of  profits.  This  outcome,  if 
effectuated,  will  be  as  absurd  as  it  will  be  unpopular  and  fugitive ; 
for  there  is  no  reason  to  think  that  Congress  will  be  any  more 
considerate  of  the  rights  and  privileges  of  private  railroad  owner- 
ship after  the  war  than  it  was  during  the  ten  years  preceding  it. 
Public  patience  indeed  tolerated  poor  service  at  comparatively 
high  rates  as  a  public  necessity  during  the  war  and  reconstruc- 
tion periods.  But  the  railroads  were  then,  and  are  now  being 
operated  as  a  Government  function,  and  whenever  they  cease  to 
be  so  operated  the  former  antagonism  against  private  privileges 
and  even  private  rights  will  reassert  itself,  both  in  and  out  of 
Congress.  Except  as  a  figure  of  speech,  the  railroads  have  al- 
ready been  irrevocably  nationalized — but  not  paid  for — and  what 
the  owners  are  demanding  under  verbal  cover  of  a  return  to  pri- 

[766] 


No.  4]  NATIONALIZING  THE  RAILROADS  255 

vate  ownership  is  in  reality  the  delegation  of  agency  powers  to 
operate  and  speculate,  with  assured  profits  and  no  risk. 

Is  not  a  government  promise  that  rates  shall  be  kept  sufficiently 
high  to  recompense  invested  capital  and  to  attract  new  capital 
less  desirable  than  will  be  a  valuation  of  railroad  properties  ac- 
companied by  a  definite  guarantee  of  interest  upon  them,  or  an 
exchange  of  railway  securities  for  government  bonds?  The  Fed- 
eral Government  must  in  the  end  hold  the  bag  under  all  recom- 
mendations which  can  be  made.  Why  then  should  it  be  asked 
for  anything  more  than  a  direct  interest  payment  or  an  exchange 
of  public  bonds  for  private  securities? 

A  guarantee  of  interest  is  a  simple,  direct  obligation  of  the 
government  easily  understood,  and,  if  once  undertaken,  not 
likely  to  be  avoided.  The  delegation  of  the  power  to  initiate  rate- 
making  on  a  basis  sufficiently  remunerative  to  provide  for  all 
contingencies  and  to  include  a  profit  in  addition,  will  be  a  more 
complicated  obligation  for  the  government  to  enter  into  and 
one  which  is  much  more  likely  to  be  avoided  by  Congress  in  def- 
erence to  popular  opposition  to  high  rates  and  special  privilege. 
Profits  are  elusive  and  will  be  attacked  and  must  be  defended. 
Interest  payments  on  railroad  securities  transmuted  into  govern- 
ment bonds  are  definite  obligations. 

Have  not  security  owners  been  wrongly  advised  to  demand 
that  the  legal  basis  for  rates  shall  be  their  vested  interest  in  the 
roads  regardless  of  changed  conditions?  Whether  the  object 
of  this  demand  is  really  the  establishment  of  profitable  rates,  or 
is  intended  to  establish  indirectly  by  statute  a  basis  of  value  for 
subsequent  expropriation,  the  consequence  of  either  motive  will 
be  to  raise  a  dangerous  provocative  issue  against  railroad  security 
owners  who  will  be  accused  of  attempting  to  create  fictitious 
profits  and  values  by  legislation. 

Since  the  physical  valuations  of  railroad  properties  thus  far  re- 
ported by  the  Interstate  Commerce  Commission  are  unexpectedly 
liberal  and  since  the  present  government  guarantees  also  afford 
a  reasonable  basis  for  expropriation — from  the  security  owners' 
standpoint,  is  not  the  present  time  more  propitious  for  appealing 
to  Congress  to  take  over  the  roads  than  after  a  protracted,  un- 
popular and  doubtful  struggle  to  obtain  largely  increased  rates 
shall  have  been  gone  through  with?  Director  General  Hines  has 
stated  that  rates  will  not  be  increased  during  the  period  of  federal 
control.    Is  there  any  reasonable  ground  for  the  belief  that  what 

[767] 


256  RAILROAD  LEGISLATION  [Vol.  VIII 

has  been  denied  during  the  period  of  public  operation  for  public 
use,  will  be  permanently  acceded  to  during  a  possible  period  of 
private  operation  for  private  profit  ?  When  private  competition — 
that  is  initiative — stops,  private  profit  should  also  stop,  because 
no  equivalent  service  is  rendered  in  exchange.  All  that  investors 
can  then  reasonably  ask  or  expect,  is  to  get  back  the  just  value 
of  their  investments  after  having  organized  service. 

Profits  in  Excess  of  Wages  and  Interest  Not  Available  for  Either 

Labor  or  Capital 

The  railroad  employees'  demand  for  lower  living  costs  or 
higher  pay  and  the  truthful  though  stultifying  admission  that 
higher  pay  necessarily  implies  still  higher  living  costs,  have  served 
to  focus  the  attention  of  the  country  upon  the  necessity  for 
promptly  deciding  what  shall  be  done.  Perhaps  it  is  as  well  that 
the  impasse  into  which  the  railroad  problem  has  brought  us  should 
be  broken  through  in  this  rough  maner  since  apparently  little 
progress  towards  solving  it  otherwise  was  being  made. 

The  interdependent  relationship  between  wages  and  prices  is 
evident.  The  working  people  are  the  great  mass  of  the  population. 
They  are  the  body  of  consumers  who  in  fact  pay  the  high  com- 
modity prices  which  are  in  part  occasioned  by  their  exaction  of 
a  living  wage.  If  wages  go  up,  living  expenses  go  up;  and  the 
wages  of  transportation  workers  intimately  affecting  as  they  do 
the  cost  of  all  commodities  are  the  most  potential  of  all  factors 
to  raise  or  depress  prices.  They  may  in  fact  be  regarded  as  the 
keystone  of  the  cost-price  structure.  Do  not  the  brotherhoods 
spoil  their  argument  for  government  ownership  by  coupling  with 
it  a  demand  for  a  contingent  operatives'  profit?  Wages  must 
be  adjusted  at  least  to  the  point  of  restoring  purchasing  power, 
but  operative  profiteers,  whenever  they  show  themselves,  will 
be  just  as  objectionable  to  the  farmers,  factory  workers,  city 
dwellers  and  voters  of  the  country  as  are  stock  exchange  and 
safe  deposit  (  ?)  profiteers.  A  government-ownership  issue  will 
doubtless  be  introduced  into  the  next  campaign,  but  it  is  safe  to 
say  it  will  not  prove  popular  if  accompanied  by  a  class-profiteer- 
ing plan. 

The  increased  expense  of  operating  the  railroads,  apart  from 
higher  material  and  labor  costs  is  in  part  the  consequence  of 
inefficient  functioning  and  in  part  the  result  of  a  conscious  and 
unconscious  sabotage,   which  permeates  the  service  because  no 

[768] 


No.  4]  NATIONALIZING  THE  RAILROADS  257 

one's  status  has  been  established  and  the  system  itself  is  believed 
to  be  temporary.  Indeed,  we  do  not  now  have  government  op- 
eration, but  instead  a  quasi-private,  quasi-public  operation,  one 
of  the  recognized  objectives  of  which  is  to  discredit  the  govern- 
ment and  so  bring  about  a  return  to  the  old  order  of  things. 

As  to  a  division  of  prospective  profits  between  operators  and 
security  owners,  to  serve  as  an  incentive  to  efficiency,  the  answer 
is  that  there  is  small  likelihood  of  profits  where  there  is  not  re- 
sponsibility for  losses  and,  if  there  shall  be  profits,  the  operatives 
will  demand  them  all  and  probably  will  get  them  to  the  exclusion 
of  the  holders  of  securities  and  the  public.  The  promise  of  such 
profits  will  also  serve  as  an  incentive  to  conspiracy  between  own- 
ers and  operatives  and  to  still  further  demands  for  larger  profits 
out  of  the  public. 

Since  it  is  admitted  that  the  government  will  hereafter  exercise 
the  essential  functions  heretofore  left  to  private  initiative,  since 
it  must  undertake  compensation  to  owners  for  their  properties, 
and  pay  the  highest  going  wages  for  their  operation,  why  should 
it  be  called  upon  further  to  burden  itself  with  profits  either  for 
owners  or  for  operatives  ? 

Terminal  Integration  and  Highway  Competition 

Improved  highway  transportation  and  unified  terminal  ope- 
ration at  interior  transfer  cities  and  at  seaports,  made  necessary 
by  the  stress  of  war  conditions,  has  so  completely  demonstrated 
the  advantages  of  integrating  transportation  functions,  that  it 
is  probable  that  integration  will  be  extended  and  will  not  be 
reserved.  If  so,  how  will  it  be  possible  to  unscramble  the  ter- 
minals at  the  great  cities?  If  the  terminals  are  be  used  jointly 
why  not  the  roads? 

It  has  become  the  general  custom  to  short-haul  commodities 
between  points  of  origin  and  destination  by  motor  trucks  over 
the  public  highways.  The  advantages  of  this  as  compared  with 
the  former  railway  service  involving  three  hauls  and  two  addi- 
tional transfer  handlings  needs  no  comment.  Railroad  revenues 
have  suffered  severely  as  a  consequence  of  this  change,  and  they 
will  continue  to  suffer. 

Private  Rail  Profits  and  Public  Waterways  Incompatible 
Improved  waterway  transportation  has  not  yet  been  permitted 
to  exercise  its  full  influence  upon  railway  communications  since 

[769] 


258  RAILROAD  LEGISLATION  [Vol.  VIII 

the  Federal  Government  functioning  in  its  present  dual  capacity 
as  guardian  of  the  public  interest  and  also  as  trustee  for  the 
security  owners,  cannot  with  justice  permit  unrestricted  water 
competition  to  take  effect. 

Under  pre-war  conditions  the  railroad  policy  of  the  country 
was  deliberately  and  necessarily  planned  to  prevent  the  most 
effective  utilization  of  its  vast  inland  and  coastwise  water  carrying 
systems.  As  long  as  the  government  shall  continue  directly  or 
indirectly  to  administer  the  roads  under  guarantees  of  profit 
instead  of  acquiring  them,  its  necessity  for  maintaining  railroad 
revenues  with  which  to  meet  its  guarantees  and  also  its  obligation 
to  return  the  roads  to  their  owners  properly  safeguarded,  compel 
it  in  part  to  pursue  the  same  policy  of  discrimination  against 
water  and  in  favor  of  rail  transportation  which  characterized 
the  relations  of  the  railroads  to  the  waterways  for  fifty  years 
prior  to  the  war.  That  policy  was  one  of  destructive  compe- 
tition successfully  directed  to  the  elimination  of  water  trans- 
portation except  as  a  potential  influence  upon  freight  rates. 

No  satisfactory  joint  use  of  rail  and  water  carriers  in  such  a 
manner  as  to  realize  the  full  benefits  of  both  services  can  be  had 
while  the  two  kinds  of  transportation  shall  continue  to  be  antag- 
onistic to  each  other — one  private,  the  other  public — or  so  long 
as  there  shall  be  an  obligation  to  consider  the  profit  and  loss 
account  of  one  system  apart  from  the  whole.  A  single  federal 
control  is  necessary  to  reconcile  these  rival  interests.  Such  con- 
trol should  be  complete  over  the  railroads  both  as  regards  owner- 
ship and  administration,  and  at  the  beginning,  at  least,  directive 
over  the  water  routes. 

The  great  water  routes  of  the  country  are  the  Panama  and 
West  Coast  route  with  its  potential  joint  railroad  utilization;  the 
Atlantic  coastal  route  with  its  similar  rail  connections ;  the  Great 
Lakes  route  with  its  double  water  outlet  via  New  York  and 
Montreal  and  its  utilization  for  combined  rail  and  water  service ; 
the  Erie  Canal  system ;  the  Mississippi  and  Ohio  River  system ; 
the  Black  Warrior  system  and  the  Chesapeake  and  Delaware 
system,  including  its  possible  extension  north  to  Boston  and  south 
of  Norfolk. 

The  two  ocean  systems  have  been  effectively  utilized  as  all- 
water  carrier  routes,  the  Great  Lakes  system  has  been  eminently 
so  developed,  and  combined  water  and  rail  service  on  these  three 
routes  has  been  as  effective  as  the  railroads  would  permit.  Trans- 

[770] 


No.  4]  NATIONALIZING  THE  RAILROADS  259 

portation  on  the  other  routes,  while  indirectly  tending  to  lower 
railroad  freight  rates,  has  not  been  materially  advanced  because 
of  the  obstructive  policy  which  the  rail  carriers  and  the  govern- 
ment itself  for  the  time  being,  have  of  necessity  been  compelled 
to  adopt  toward  the  water  carriers  in  the  attempt  to  maintain  the 
profits  of  private  rail  ownership.  While  all-water  transportation 
over  these  routes  has  been  minimized,  it  has  also  been  made 
economically  impossible  to  develop  the  best  system  of  combined 
rail  and  water  service  by  which  communities  away  from  the  water 
could  obtain  the  advantages  of  linking  the  cheaper  but  restricted 
water  service  with  the  ubiquitous  railroad  service.  There  has 
never  been  a  fair  or  satisfactory  basis  for  pro-rating  Combined 
water  and  rail  shipments.  United  States  railroad  rates  are  com- 
paratively low  near  and  along  the  waterways  and  comparatively 
high  traversely  to,  and  away  from,  them.  If  railway,  highway, 
and  waterway  transportation  and  terminals  shall  be  modernized 
and  used  jointly  for  the  benefit  of  the  whole  country  in  conjunc- 
tion with  a  fair  basis  of  pro-rating  between  rail  and  water  car- 
riers, then  railroad  transportation  cannot  be  conducted  as  a  seg- 
regated business. 

In  this  connection,  it  is  urgently  recommended  that  the  report 
of  the  Inland  Waterways  Committee  of  the  Railroad  Administra- 
tion, which  has  submitted  to  the  Director  General  in  the  summer 
of  1918,  be  now  published  and  studied  in  its  relation  to  the  rail- 
way problem. 

Until  a  national  cooperative  policy  between  land  and  water 
carriers  shall  have  been  established,  there  can  be  only  one  safe 
policy  for  waterway  development;  viz.,  to  consider  the  great 
inland  waterway  routes  as  arms  of  the  sea,  upon  which  trans- 
portation shall  be  freely  competitive  and  unrestricted  as  to  rates 
and  conditions  of  service.  Public  funds  for  physical  improve- 
ments of  channels,  locks  and  terminals  must  be  continuously 
demanded  and  also  the  most  favorable  conditions  for  interchange 
of  service  with  railroads  to  cities  not  accessible  directly  by  water 
must  be  insisted  upon.  Only  by  the  cultivation  of  an  imperative 
public  demand  for  these  factors  of  success  can  waterway  trans- 
portation be  safeguarded  against  the  adverse  attacks  of  private 
railroad  interests. 

The  Government  has  begun  to  equip  the  Mississippi  River  and 
the  Erie  Canal  with  modern  fleets  which  are  already  in  com- 
petition with  the  railways  and  can  under-bid  them  for  coarse 

[7711 


260  RAILROAD  LEGISLATION  [Vol.  VIII 

freights.  On  both  of  these  inland  waterways  the  Government 
now  controls  transportation.  What  then  will  be  the  consequence 
of  divesting  itself  of  the  control  and  operation  of  the  railroads? 
How  can  it  hope  to  reconcile  a  public  competitive  waterway 
policy,  with  a  private  gainful  policy  of  operating  the  railroads? 
The  Government  fleets  will  be  expanded,  private  boat  owners 
will  claim  the  advantages  accorded  the  Government  boats,  and 
the  coast-wise  traffic  will  develop  a  similar  conflict  of  interests, 
and  the  clashing  of  these  interests  will  be  disastrous  for  all,  if 
the  Government  shall  separate  the  administration  of  the  water- 
ways from  that  of  the  railways. 

It  will  be  to  the  interest  of  American  seaports  to  establish  a 
short-haul  movement  from  the  point  of  origin  to  the  nearest  water 
route  leading  to  such  ports  whether  it  be  an  inland  waterway 
route  or  a  coastal  route.  No  universal  rule  can  here  be  applied 
other  than  to  say  that  instead  of  giving  preference  as  heretofore 
to  the  long  rail  haul,  wherever  economies  can  be  shown,  a  com- 
bined rail  and  water  service  to  the  seaport  should  be  made  pos- 
sible. 

For  instance,  southern  cotton,  coal,  lumber  and  other  coarse 
freights  should  more  generally  be  forwarded  to  the  New  England 
mill  district  via  a  rail  haul  to  the  coast  and  thence,  by  water  to 
the  New  England  factories  which  are  for  the  most  part  located 
within  motor  truck  distances  from  tidewater. 

Through  its  control  of  the  eastbound  grain  business  at  Buffalo, 
the  Government  is  now  in  control  of  traffic  on  the  Erie  canal, 
because  the  east  bound  grain  movement  is  the  dominating  factor 
in  canal  policy.  The  United  States  Railway  Administration  con- 
trols this  New  York  State  waterway  by  this  means,  just  as  effect- 
ively as  it  controls  the  traffic  through  the  Panama  canal.  The 
automatic  influence  which  the  Erie  canal  formerly  exercised  over 
railroad  freight  rates  is  consequently  now  vested  in  the  United 
States.  The  Government  has  in  this  matter  assumed  a  heavy 
responsibility  which  will  be  greatly  complicated  if  the  railroads 
even  temporarily  go  back  to  private  operation. 

Is  it  probable  that  the  public  opinion  of  the  country  will  tolerate 
a  discontinuance  of  highway,  waterway,  railway  and  seaport  ter- 
minal integration  in  order  to  conserve  the  profits  of  an  out- 
grown, non-competitive  private  system  of  rail  transportation? 

The  economic  movement  of  food,  fuel,  and  raw  materials  to 
and   from   our  growing  municipal   centers   and   the   conduct   of 

[772] 


No.  4]  NATIONALIZING  THE  RAILROADS  261 

our  exports  to  the  sea  in  competition  with  foreign  rivals  is 
opposed  to  such  a  policy. 

The  prospective  separation  of  terminal  charges  from  the  line 
haul  in  order  to  conserve  badly  needed  railroad  revenues  and  to 
stimulate  local  enterprise  in  modernizing  terminals,  is  in  con- 
flict with  such  a  policy. 

The  best  use  of  our  waterways  and  their  progressive  utilization 
to  avoid  the  otherwise  heavy  expense  of  additional  railroad  con- 
struction necessary  to  meet  the  expanding  needs  of  the  country's 
commerce,  is  out  of  line  with  such  a  policy,  as  is  the  declared 
unwillingness  of  railroad  operatives  to  live  and  work  in  peace- 
ful cooperation  under  private  ownership. 

"Private  Operation"  a  Myth 

The  average  stockholder  is  more  careless  of  his  vote  than  is 
the  average  citizen.  There  never  has  been  a  stockholders'  man- 
agement in  the  popular,  democratic  sense.  What  we  have  here- 
tofore had  through  proxy  representation,  has  been  in  the  first  in- 
stance control  by  speculative  promoters  for  development  purposes 
followed  later  by  exploitive  bankers'  control.  What  the  country 
now  needs  and  is  preparing  to  get,  is  technical  control  exercised 
through  actual  management  and  modified  by  popular  opinion 
as  expressed  through  Government  representation. 

Since  the  departure  of  the  great  competitive  organizing 
owners,  the  roads  have  been  run,  are  being  run,  and  will  continue 
to  be  run,  by  expert  operatives,  from  the  track  boss  up  through 
the  engineering  and  accounting  staffs  to  the  President  of  the 
road  and  the  Director  General ;  and  the  sooner  this  fact  shall 
be  recognized  by  the  Government,  the  public  and  by  security 
owners,  the  better  for  all  concerned.  The  quality  now  most 
needed  to  bring  about  efficient  operation,  is  esprit  de  corps  in 
an  operation  staff  composed  of  representatives  of  the  Govern- 
ment, representatives  of  the  official  and  classified  services  and 
representatives  of  the  owners  until  these  latter  shall  have  been 
expropriated.  Such  a  staff  will  in  time  generate  efficiency — not 
indeed  equal  to  that  which  existed  before  competition  ended, 
nor  as  bad  as  politics  alone  can  otherwise  make  it. 

Efficient  service  rendered  to  the  public,  not  for  bonuses  and 
tips,  as  has  been  proposed,  but  for  just  wages  and  salaries,  in  a 
distinguished  and  honorable  public  service  is  what  the  operatives 

[773] 


262  RAILROAD  LEGISLATION  [Vol.  VHI 

and  the  country  require  and  may  ultimately  expect  from  the 
staff. 

Absolute  safety  founded  on  a  just  basis  of  values  is  what  the 
security  owner  most  needs — in  other  words,  a  Government  bond 
— and  if  he  delays  much  longer  to  press  for  this,  in  the  hope  of 
securing  the  elusive  chance  of  speculative  profits,  based  on 
politically  delegated  control  over  rate  making,  he  is  likely  to  miss 
his  market. 

Director  General  McAdoo's  recommendation  that  Government 
control  shall  be  extended  over  a  period  of  five  years — carrying 
with  it  the  tacit  implication  of  perpetuity — is  still  the  common- 
sense  indication  of  the  way  out. 

By  temporizing,  and  by  camouflaging  novel  facts  at  variance 
with  American  experience,  it  soothes  susceptibilities,  and  affords 
the  needed  opportunity  for  gradually  bringing  about  a  change  in 
our  institutions  which  otherwise  would  be  regarded  as  revolu- 
tionary. 

Within  the  five-year  period  a  national  policy  can  be  worked 
out,  fair  to  all  interests,  and  which  will  prevent  the  otherwise 
inevitable  exploitation  of  owners,  operatives  and  the  public. 

The  country  may  not,  however,  proceed  directly  or  indirectly  to 
nationalize  its  railway  system.  As  a  resultant  of  the  influences 
at  work,  this  may  finally  be  accomplished  through  a  series  of 
transmigrations  camouflaged  as  quasi-private  ownership  schemes, 
such  as  those  now  pending  in  Congress.  Organization  of  this 
kind  will,  however,  tend  to  make  Government  control  more  com- 
plex and  burdensome  in  deference  to  a  public  opinion  which  will 
resent  any  Government  assurance  of  private  profit.  Coinci- 
dently,  organized  labor  will  not  function  harmoniously  under 
any  semblance  even,  of  private  operation,  and  rates  for  service 
will  fluctuate  with  changing  political  conditions.  The  weak 
points  of  private  and  public  operation  will  be  accentuated  and 
the  advantages  minimized  by  all  such  attempts  at  mixed  control 
and  divided  responsibility.  During  such  an  interregnum  devel- 
oping experience  will  continue  to  point  the  way  to  the  one  inevi- 
table conclusion — viz.,  complete  Government  ownership,  opera- 
tion and  responsibility. 

(In  this  article  I  have  not  referred  to  the  influence  of  inflation  of  Gov- 
ernment credit  upon  railroading.  This  is  a  most  disturbing  factor  as 
it  is  in  every  branch  of  commerce  and  industry,  but  its  principal  con- 
sequence is  to  accentuate  and  make  more  exigent  conditions  which  would 
otherwise  have  worked  out  the  same  results  more  slowly). 

[774] 


APPENDIX 

REPORT  OF  THE  ANNUAL  MEETING  COMMITTEE 

The  Committee  planned  for  the  Annual  Meeting  of  the  Acad- 
emy (39th  Year)  a  two-day  national  conference  on  the  subject 
of  Railroad  Legislation.  The  conference  was  held  on  Friday  and 
Saturday,  November  21-22,  and  consisted  of  four  sessions  and 
a  dinner  meeting,  with  the  following  sub-topics : 

1.  The  Railroads  and  the  Shipper. 

2.  The  Railroads  and  the  Investor. 

3.  Railroad  Legislation  (the  dinner  meeting). 

4.  The  Railroads  and  Labor. 

5.  The  Railroads  and  the  Public. 

The  aim  of  the  Committee  was  to  focus  attention,  as  far  as 
possible,  upon  the  two  pending  Congressional  proposals  for  rail- 
road legislation,  namely,  the  House  and  the  Senate  Committee 
bills,  and  the  problems  of  railroad  legislation  connected  directly 
with  those  two  proposals. 

With  the  first  edition  of  the  program  of  the  conference  there 
was  sent  to  every  member  of  the  Academy  and  to  those  invited 
to  attend  the  conference  a  copy  of  a  chart  prepared  by  Mr.  Rich- 
ard Waterman  for  the  United  States  Chamber  of  Commerce 
Committee  on  Railroad  Legislation,  giving  a  summary  of  the 
seven  different  plans  for  railroad  legislation  which  had  been  sub- 
mitted to  Congress.  At  the  conference  itself  Mr.  Waterman  pre- 
sented a  digest,  in  parallel  columns,  of  the  two  Congressional 
Committee  proposals.  Naturally  many  aspects  of  the  general 
problems  of  railroad  legislation  not  directly  involved  in  the  two 
Congressional  proposals  came  in  for  their  share  of  discussion  by 
the  speakers  on  the  program.  This  is  particularly  true  of  the 
general  discussion  of  governmental  ownership  and  operation. 

Dr.  Albert  Shaw,  Vice-President  of  the  Academy,  who  had  ex- 
pected to  preside  at  the  opening  session,  was  unfortunately  pre- 
vented from  being  present,  and  Professor  T.  W.  Van  Metre,  of 
Columbia  University,  very  kindly  took  his  place.  Professor  Van 
Metre  also  gave  the  sub-committee  on  program  very  valuable 
expert  assistance  and  has  kindly  consented  to  edit  the  volume  of 
Proceedings  in  which  the  papers  and  report  of  the  discussion  at 
this  meeting  will  be  published. 

[775] 


264  APPENDIX  [Vol.  VIII 

Professor  Thomas  Reed  Powell,  of  Columbia  University,  pre- 
sided at  the  second  session.  Mr.  Thomas  W.  Lamont,  Vice- 
President  of  the  Academy,  presided  at  the  dinner  meeting,  at 
the  beginning  of  which  Professor  Lindsay,  President  of  the 
Academy,  made  a  brief  general  statement  concerning  the  pro- 
gram of  the  conference.  Professor  Henry  R.  Seager  presided  at 
the  third  session  and  Professor  E.  R.  A.  Seligman  presided  at 
the  fourth  and  closing  session. 

At  the  dinner  meeting,  in  addition  to  the  speakers  on  Railroad 
Legislation,  the  following  gentlemen  were  invited  to  be  guests  of 
honor : 

The  Right  Hon.  Viscount  Edward  Grey,  British  Ambassador 

to  the  United  States. 
Representatives  from  the  delegates  to  the  International  Trade 
Conference : 

M.  Eugene  Schneider,  Chairman  of  the  French  Economic 
Mission  to  the  United  States  and  Chairman  of  the 
Creusot  Steel  Works;  former  member  of  the  Chamber 
of  Deputies. 

Sir  Arthur  Shirley  Benn,  M.P.,  Chairman  of  the  British 
delegation. 

Commander  Engineer  Ferdinando  Quartieri,  Chairman  of 
the  Italian  delegation. 

M.  Florimond  Hankar,  Chairman  of  the  Belgian  delega- 
tion. 

Commander  Giorgio  Mylius,  President  of  the  Italian 
Master  Cotton  Spinners  and  Weavers  Association. 

Professor  Albert  H.  Janssen,  of  the  University  of  Louvain 
and  Director  of  the  National  Bank  of  Belgium. 

M.  Eugene  Loizeau,  Engineer,  assistant  to  the  Director  of 
the  Credit  Lyonnais. 

Edward  A.  Filene,  Boston,  Chairman  of  the  United  States 
Chamber  of  Commerce  Committee  to  the  International 
Trade  Conference. 

Representative  delegates  to  the  International  Labor  Confer- 
ence: 

Professor  Ernest  Mahaim,  Belgium. 

M.  Arthur  Fontaine,  France. 

The  Right  Hon.  G.  M.  Barnes,  M.P.,  Great  Britain. 

G.  H.  Stewart  Bunning,  Great  Britain. 

Mgr.  Dr.  W.  H.  Nolens,  Holland. 

Baron  Mayor  des  Planches,  Italy. 

Professor  Adelfor  G.  Posada,  Spain. 

Dr.  Nicholas  Murray  Butler,  President  of  Columbia  Univer- 
sity. 

[776] 


No.  4]  APPENDIX  265 

Mr.  Jose  Fidele  Lagos,  "La  Prensa,"  Buenos  Aires,  Argentine 

Republic. 
Professor  Graham  Wallas,  University  of  London. 
Dr.  Carl  Kelsey,  Acting  President  of  the  American  Academy 

of  Political  and  Social  Science. 
Major  George  Haven  Putnam,  English-Speaking  Union,  New 

York. 

Owing  to  changes  in  the  program  for  the  official  entertainment 
of  the  Prince  of  Wales  in  New  York  City  on  the  evening  of 
November  22nd,  Lord  Grey  was  unable  to  be  present,  and  for 
the  same  reason  several  of  the  delegates  to  the  International  Trade 
Conference  were  prevented  from  being  present,  but  Commander 
Mylius,  Professor  Janssen  and  M.  Loizeau  were  present  to  rep- 
resent their  colleagues  of  the  International  Trade  Conference.  No 
member  of  the  International  Labor  Conference  was  able  to  leave 
Washington  at  that  time  because  of  the  fact  that  their  conference 
was  endeavoring  to  complete  its  program  in  the  month  of  Novem- 
ber and  required  their  daily  and  hourly  presence  in  Washington. 
The  following  greeting  of  the  President  of  the  Academy  to  the 
members  of  both  of  these  conferences  was  therefore  given  at  the 
closing  session  of  the  annual  meeting  instead  of  constituting  a 
part  of  the  program  of  the  dinner  meeting,  as  originally  planned 
by  the  Committee. 

Dr.  Lindsay,  in  closing  the  final  session  of  the  annual  meeting 
and  the  national  conference  on  Railroad  Legislation,  after  thank- 
ing the  speakers  and  those  who  had  participated  in  the  discus- 
sion throughout  both  days,  said : 

It  was  the  intention  of  the  Academy  at  the  dinner  meeting  last  night 
to  depart  from  the  program  on  Railroad  Legislation  for  the  brief  space 
of  half  an  hour  to  greet  and  hear  from  the  foreign  delegates  to  the  Inter- 
national Trade  Conference  and  the  International  Labor  Conference.  Un- 
fortunately the  time  did  not  permit  and  the  arrangements  did  not  quite 
permit  us  to  carry  out  that  part  of  the  program.  We  wanted  to  give 
expression  at  this  annual  meeting  to  what  is  doubtless  in  the  minds  of 
every  member  of  the  Academy,  of  our  interest  in  these  new  beginnings 
in  international  co-operation  that  are  so  significant  and  so  full  of  promise 
for  the  future  development  of  our  industries  and  for  the  future  develop- 
ment of  our  economic  life  as  reflected  in  this  railroad  problem  that  we 
are  discussing.  There  are  two  important  international  conferences  re- 
cently assembled  in  this  country:  the  International  Trade  Conference, 
and  the  International  Labor  Conference  which  is  still  sitting  in  Washing- 
ton. Unfortunately  for  us  the  latter  organization  is  so  burdened  with 
its  labors  which  it  wishes  to  bring  to  a  happy  conclusion  this  month  that 

[777] 


266  APPENDIX  [Vol.  VIII 

they  are  sitting  long  hours  and  its  members  are  unable  to  leave  Wash- 
ington for  even  one  evening's  diversion  in  New  York.  We  invited  some 
half  dozen  of  them — representative  members  of  that  conference — to  be 
guests  of  honor  at  our  conference.  They  all  expressed  the  keenest  interest 
in  our  meeting  and  sent  very  warm  greetings,  but  unfortunately  no 
single  member  of  the  conference  could  get  here  for  the  meeting  last 
night. 

The   International   Trade   Conference  has  been  in   session  at  Atlantic 
City.     It  has  adjourned  and  its  members,  about   sixty  in  number,  rep- 
resenting economic  missions  from  France,  Italy,  Great  Britain,  Belgium 
and  other  countries,  have  been  touring  the  country  and  have  just  returned 
to  New  York.     They  arrived  here  at  a  very  late  hour  Thursday  night. 
They  were  almost   overwhelmed  by  the   hospitality  that  the  Merchants 
Association  had  planned   for  them   during  the  two   or  three  days   they 
are  to  be  here  in  New  York.     It  was  very  difficult  for  any  of  them  to 
attend  this  conference.     Three  of  their  delegates,  however,  were  present 
last  night  and  I  think  we  owe  them  an  apology  for  the  fact  that  the  hour 
was  so  late  when  the  railroad  discussion  was  finished  that  there  was  no 
opportunity  to  express  this  greeting  then  or  to  hear   from  them.     One 
of  the  leading  members  of  that  conference  is  the  Chairman  of  the  French 
delegation,  Mr.  Schneider,  the  head  of  the  Creusot  Steel  Works,  a  very 
broad-minded,  statesman-like  business  man.     He  was  very  eager  to  be  at 
our   meeting  last   night   and  wanted  to   say   a    few   words   to   our  con- 
ference concerning  their  mission  to  the  United  States.     He  sent  as  his 
representative  Mr.   Eugene   Loizeau,  the  assistant  to  Baron  De  Morais, 
the  Director  of  the  Credit  Lyonnais.     He  was  at  the  dinner  last  night 
and  was  prepared  to  have  said  a  few  words  on  the  mission  of  the  Inter- 
national Trade  Conference  to  this  country,  had  there  been  time.     There 
was  also  with  him  Professor  Janssen  of  the  University  of  Louvain  and 
Commander  Mylius  of  the  Italian  delegation.     There  were  also  present 
Mr.  Filene  of  the  United  States  Chamber  of  Commerce  and  Mr.  Farquhar, 
who  were  active  in  arranging  for  that  conference.     I  do  not  think  we 
ought   to   let   this    annual    meeting   adjourn    without    saying   a    word   of 
greeting  to  both  of  those  conferences  and  to  express  to  them  the  thought 
that  undoubtedly  represents  the  very  large  majority  of  opinion  of  such 
gatherings  as  this— that  the  United   States  means  to  do  its  part  in  the 
international  affairs  of  the  world,  and  although  there  are  political  com- 
plications which  our  foreign  friends  may  have  great  difficulty  in  under- 
standing—I refer  first  to  our  friends  who  are  here  and  also  to  the  far 
greater  number  who  have  never  been  here  and  who  will  be  still  less  able 
to  understand— why  we  hesitate,  why  we  have  thrown  away  this  oppor- 
tunity, why  we  seem  to  fail  to  grasp  the  greatest  opportunity  that  has 
come  to   any  nation   in  the  world.     America  is  not  going  to  lose  that 
opportunity   entirely.     We   were   very   slow    rising   to   the   occasion   and 
doing  our  part  in  the  great  conflict.     Many  of  us  were  very  impatient 
at  the  slowness  of  the  government  leadership  and  the  slowness  of  public 
opinion  generally  throughout  the  country  in  rising  to  our  duty  and  our 
opportunity  in  that  matter,  but  we  did  finally  assert   ourselves   in  that 

[778] 


No.  4]  APPENDIX  267 

conflict  in  a  way  that  has  given  America  cause  for  just  pride.  I  believe 
that  in  this  new  era  of  international  organization  of  public  affairs  we 
will  find  a  way — just  how  it  is  going  to  be  found  I  do  not  know — but 
I  believe  that  we  will  find  a  way  of  coming  in,  even  at  the  eleventh  hour, 
and  doing  our  part.  I  think  we  can  assure  our  friends  of  these  two 
great  conferences,  the  beginnings  of  what  will  undoubtedly  be  a  series  of 
world  conferences  (many  of  which  I  hope  will  find  it  to  their  interest 
and  pleasure  to  meet  in  this  country),  that  we  will  find  a  way  of  taking 
our  proper  part  and  lending  help  and  counsel  and  reaping  the  benefits  of 
joint  counsels  in  a  better  and  more  orderly  arrangement  of  world  affairs 
and  in  the  guarantees  of  permanent  peace. 

In  addition  to  the  papers  and  addresses  printed  in  the  volume 
of  Proceedings  and  the  more  or  less  extensive  remarks  of  some 
of  those  who  took  part  in  the  informal  discussion  and  who  have 
been  good  enough  to  expand  their  remarks  into  brief  papers, 
which  are  also  published  in  this  volume,  the  following  persons 
took  part  in  the  informal  discussion:  At  the  first  session  on 
Railroads  and  the  Shipper,  Mr.  M.  H.  Winkler,  of  Winkler  and 
Rogers,  New  York  City ;  at  the  second  session  on  Railroads  and 
the  Investor,  Mr.  S.  E.  Heberling,  of  the  Switchmen's  Union  of 
North  America,  Buffalo,  New  York;  Mr.  George  Scoville  Ham- 
lin and  Mrs.  L.  C.  Zicarelli,  of  New  York  City.  At  the  dinner 
meeting,  Mr.  Thomas  W.  Lamont,  of  J.  P.  Morgan  and  Co., 
presided,  and  in  his  introductory  remarks  referred  forcibly  to 
the  very  great  importance  of  the  railroads  and  the  proper  solution 
of  the  railroad  problem  as  the  basic  factor  in  the  economic  life 
and  prosperity  of  the  United  States.  At  the  fourth  session  Hon. 
Herbert  C.  Pell,  Jr.,  Congressman  from  the  17th  New  York 
District,  spoke  extemporaneously  on  the  objections  to  govern- 
ment ownership  and  operation  of  railroads  and  the  desirability 
in  any  solution  of  the  railroad  problem  under  government  regu- 
lation of  giving  the  railroads  a  fair  chance  to  make  all  the  profit 
consistent  with  the  highest  standards  of  public  service  which  the 
government  ought  to  supervise  and  enforce.  Mr.  Pell  also 
pointed  out  how  the  members  of  the  conference  and  educated 
public  opinion  generally  could  apply  the  information  gained  in 
a  conference  of  this  character  and  exert  real  political  influence 
on  Congress  in  shaping  the  railroad  policy  of  the  government. 
Mr.  Frederick  J.  Lisman,  of  New  York  City,  and  Mr.  Arthur  B. 

Farquhar,  of  York,  Pa.,  took  part  in  the  informal  discussion  of 
this  closing  session  of  the  conference. 

The  arrangements  for  the  Conference  were  greatly  facilitated 

[779] 


268 


APPENDIX 


[Vol.  VIII 


by  the  work  of  the  members  of  the  Annual  Meeting  Committee 
who  served  on  special  sub-committees  to  look  after  various  details 
of  the  plans  for  the  Conference.  The  Committee  wishes  to 
acknowledge  with  special  thanks  the  very  valuable  services  which 
Mr.  James  T.  Grady,  chief  of  the  Bureau  of  Publicity  of  Colum- 
bia University,  rendered  the  Academy  and  the  conference  as 
chairman  of  the.  Press  and  Publicity  Committee.  The  efficient 
services  of  Messrs.  H.  Feldman,  C.  B.  Austin  and  LeRoy  E. 
Bowman  on  the  committee  of  ushers  deserve  special  mention  and 
grateful  thanks. 


ANNUAL  MEETING  COMMITTEE 
SAMUEL  McCUNE  LINDSAY,  Chairman  Ex-Officio 


IRVING  T.  BUSH 

NICHOLAS  MURRAY  BUTLER 

R.  J.  CALDWELL 

THOMAS  L.  CHADBOURNE,  JR. 

JOSEPH  P.  CHAMBERLAIN 

STEPHEN  C.  CLARK 

C.  A.  COFFIN 

CHARLES  PHILLIPS  COOPER 

FREDERICK  CUNLIFFE-OWEN 

robert  w.  Deforest 

JOHN  HAYS  HAMMOND 
A.  BARTON  HEPBURN 
CHARLES  E.  HUGHES 
OTTO  H.  KAHN 
HANS  KALTENBORN 
THOMAS  W.  LAMONT 
ADOLPH  LEWISOHN 
ROSWELL  C.  McCREA 


V.  EVERITT  MACY 
DWIGHT  W.  MORROW 
AMOS  R.  E.  PINCHOT 
GEORGE  A.  PLIMPTON 
WILLIAM  L.  RANSOM 
MRS.  CHARLES  C.  RUMSEY 
JACOB  G.  SCHURMAN 
HENRY  R.  SEAGER 
E.  R.  A.  SELIGMAN 
ALBERT  SHAW 
WILLIAM  R.  SHEPHERD 
FRANCIS  H.  SISSON 
MUNROE  SMITH 
HENRY  L.  STIMSON 
OSCAR  S.   STRAUS 
THEODORE  N.  VAIL 
FRANK  A.  VANDERLIP 
T.  W.  VAN  METRE 


ANNUAL  DINNER  COMMITTEE 
THOMAS  W.  LAMONT,  Chairman 


NICHOLAS  MURRAY  BUTLER 

R.  J.  CALDWELL 

SAMUEL  McCUNE  LINDSAY 


FREDERICK  CUNLIFFE-OWEN 
OSCAR  S.  STRAUS 
FRANK  A.  VANDERLIP 


[780] 


RAILROAD  REGULATION  UNDER  THE 
TRANSPORTATION  ACT 

T.  W.  VAN  METRE 
Associate  Professor  of  Transportation,  Columbia  University 

THE  annual  meeting  of  the  Academy  of  Political  Science 
held  in  New  York,  November  21-22,  1919,  was  devoted 
to  a  discussion  of  railroad  legislation.  At  that  time  it 
was  clear  that  the  period  of  Federal  operation  of  railroads, 
which  had  begun  late  in  December,  1917,  was  approaching  an 
end,  and  Congress  was  wrestling  with  the  problem  of  formulat- 
ing a  new  policy  of  railroad  regulation.  It  was  apparent  that 
there  was  to  be  a  radical  departure  from  the  policy  in  effect  at 
the  time  Federal  control  began.  For  several  years  the  opinion 
had  been  gaining  in  strength  that  the  system  of  railroad  regu- 
lation established  by  the  laws  passed  in  1887,  1906  and  1910 
was  faulty  in  principle,  and  there  was  an  insistent  demand 
for  comprehensive  changes.  But  while  there  was  almost  uni- 
versal dissatisfaction  with  the  old  methods  of  regulation,  there 
was  a  wide  divergence  of  view  as  to  what  the  new  railroad 
policy  should  be.  Congress  was  deluged  with  "  plans  ",  each 
plan  representing,  for  the  most  part,  an  effort  to  protect  the 
interests  of  the  group  which  proposed  the  plan.  At  the  meet- 
ing of  the  Academy  in  1919  the  leading  proposals  with  respect 
to  railroad  legislation  were  fully  discussed.  The  published 
proceedings  of  the  meeting  x  constitute  a  record  of  the  views 
then  held  by  legislators,  railroad  managers,  shippers,  capital- 
ists, labor  leaders  and  prominent  economists.  The  Trans- 
portation Act  of  1920  showed  evidence  of  the  influence  of  many 
of  the  interests  represented  at  that  meeting. 

The  Transportation  Act  has  now  been  in  effect  twenty-six 
months,  and  the  Academy  has  obtained,  from  the  same  interests 
which  took  part  in  the  discussion  of  1919,  an  appraisal  of  the 
influence  of  the  law  upon  the  transportation  business  of  the 
United  States  and  upon  the  many  other  economic  activities 
with  which  the  railroads  are  closely  related.     What  have  been 

1  Proceedings  of  the  Academy  of  Political  Science,  January,  1920. 

269 


270  RAILROADS  AND  BUSINESS  PROSPERITY 

the  chief  results  of  the  Transportation  Act?  Is  the  policy 
embodied  in  that  law  superior  to  the  policy  which  preceded 
it?  Does  the  experience  of  the  past  two  years  warrant  a  belief 
that  we  have  a  reasonably  satisfactory  system  of  railroad 
regulation?  Or  should  the  Transportation  Act  be  amended? 
And  if  so,  in  what  particulars? 

Among  the  many  changes  which  the  Transportation  Act 
made  in  the  railroad  policy  of  the  Federal  Government  there 
were  three  of  outstanding  importance.  First,  the  law  con- 
tained a  rule  of  rate-making  for  the  guidance  of  the  Interstate 
Commerce  Commission,  that  body  being  directed  to  establish 
a  level  of  rates  "  so  that  carriers  as  a  whole  (or  as  a  whole 
in  each  of  such  rate  groups  or  territories  as  the  Commission 
may  from  time  to  time  designate)  will,  under  honest,  efficient 
and  economical  management  and  reasonable  expenditures  for 
maintenance  of  way,  structures  and  equipment,  earn  an  aggre- 
gate annual  net  railway  operating  income  equal,  as  nearly  as 
may  be,  to  a  fair  return  upon  the  aggregate  value  of  the  rail- 
way property  of  such  carriers  held  for  and  used  in  the  service 
of  transportation."  The  enactment  of  this  rule  of  rate-making, 
while  something  new  in  Federal  legislation,  was  nevertheless 
little  more  than  the  recognition  of  a  right  which  the  carriers 
presumably  had  always  possessed.  Of  much  greater  signi- 
ficance was  the  provision  of  the  law  designed  to  meet  the  prac- 
tical problem  arising  from  the  application  of  such  a  rule  of 
rate-making.  A  body  of  rates  which  would  yield  a  fair  return 
to  the  carriers  as  a  whole  would  permit  many  carriers  having 
exceptional  advantages  in  the  way  of  rich  traffic  territory, 
favorable  conditions  of  operation,  and  well  located  terminals, 
to  obtain  a  return  "  substantially  and  unreasonably  in  excess 
of  a  fair  return."  The  recognition  of  this  fact  led  to  the 
adoption  of  a  principle  before  unheard-of  in  Federal  law, 
the  recapture  or  recovery  by  the  government  of  a  portion  of  the 
income  of  those  carriers  whose  earnings  might  exceed  an 
amount  deemed  to  be  fair  and  reasonable.  It  was  originally 
the  plan  of  the  Senate  to  meet  the  situation  created  by  the 
unequal  earning  capacity  of  strong  and  weak  roads  by  com- 
pelling the  consolidation  of  the  railroads  of  the  country  into 
a  few  great  systems,  which  might  employ  uniform  rates  on 
competitive  traffic  and,  at  the  same  time,  earn  substantially  the 


RAILROAD  REGULATION  271 

same  rate  of  return  upon  the  value  of  their  property.  In  the 
final  draft  of  the  bill,  however,  the  compulsory  feature  of  the 
consolidation  program  was  eliminated. 

The  second  important  feature  of  the  Transportation  Act  rep- 
resented an  effort  to  bring  into  effect  a  unified,  national  system 
of  rate  regulation,  to  replace  the  dual  system  of  state  and 
Federal  control.  The  exercise  of  mutually  exclusive  powers  by 
state  and  federal  authorities  had  long  been  a  fruitful  source  of 
controversy,  and  in  many  instances  conflicting  policies  of  regu- 
lation had  resulted  in  the  creation  of  those  unreasonable  dis- 
criminations the  prevention  of  which  had  been  the  chief  pur- 
pose of  regulating  the  railroads.  Under  the  Interstate  Com- 
merce Act,  as  amended  in  1920,  when  the  Interstate  Commerce 
Commission  finds  that  rates  imposed  by  state  authority  cause 
any  undue  discrimination  against  interstate  or  foreign  com- 
merce, it  may  prescribe  rates  which  will  remove  the  discrim- 
ination ;  and  such  rates  must  be  observed  by  the  carriers,  "  the 
law  of  any  State  or  the  decision  or  order  of  any  State  authority 
to  the  contrary  notwithstanding." 

The  third  outstanding  feature  of  the  Transportation  Act 
was  the  provision  for  the  establishment  of  machinery  to  deal 
with  labor  difficulties  on  railroads.  The  law  did  not  make 
strikes  illegal,  but  it  declared  it  to  be  the  "  duty  of  all  carriers 
and  their  officers,  employees,  and  agents  to  exert  every  reason- 
able effort  and  adopt  every  available  means  to  avoid  any  inter- 
ruption of  operation  of  any  carrier  growing  out  of  any  dispute 
between  the  carrier  and  the  employees  or  subordinate  officials 
thereof."  The  act  directed  that  all  disputes  be  considered, 
and  if  possible,  decided,  by  conference  between  representatives 
of  the  carriers  and  of  the  employees  directly  interested.  For 
the  adjudication  of  disputes  not  capable  of  being  settled  by 
conference  it  authorized  the  creation  of  Railroad  Boards  of 
Labor  Adjustment,  and  established  the  Railroad  Labor  Board. 
The  Adjustment  Boards  were  designed  to  deal  with  all  disputes 
not  involving  wages.  Because  of  differences  of  opinion  be- 
tween employees  and  managers  as  to  how  these  Boards  should 
be  constituted — whether  they  should  be  local,  regional  or 
national — they  have  not  been  established.  The  only  official 
labor  tribunal  to  come  into  existence  by  virtue  of  the  Trans- 
portation  Act  was  the  Railroad   Labor   Board,   consisting  of 


272  RAILROADS  AND  BUSINESS  PROSPERITY 

nine  members  appointed  by  the  President,  the  members  being 
divided  into  three  equal  groups,  representing  respectively  labor, 
management  and  the  public.  The  Board  was  authorized  to 
state  what  in  its  opinion  constituted  reasonable  standards  of 
wages  and  working  conditions  for  railroad  labor,  being  directed 
to  take  into  consideration  the  cost  of  living,  the  scales  of  wages 
in  other  industries,  the  hazard  of  employment,  and  other 
relevant  circumstances  and  conditions.  The  Act  did  not  pro- 
vide that  the  decisions  of  the  Board  should  be  binding,  and  it 
prescribed  no  means  by  which  the  orders  of  the  Board  could 
be  enforced. 

Many  other  changes  in  the  system  of  railroad  regulation 
were  made  by  the  Transportation  Act.  Among  the  leading 
changes  in  policy  was  the  reversal  of  the  attitude  of  the  govern- 
ment toward  the  practice  of  pooling,  the  fifth  section  of  the 
Interstate  Commerce  Act  being  amended  to  permit  carriers, 
under  the  supervision  of  the  Interstate  Commerce  Commission, 
to  pool  both  traffic  and  earnings.  The  traditional  attitude  of 
the  government  toward  railroad  consolidation  was  also  modi- 
fied. Whereas  consolidation  had  previously  been  regarded  with 
disfavor,  and  not  infrequently  declared  illegal,  the  Interstate 
Commerce  Commission  was  now  directed  to  prepare  a  plan 
for  the  consolidation  of  all  the  railroads  of  the  United  States 
into  a  limited  number  of  competitive  systems ;  and  provision 
was  made  that  after  the  Commission  had  completed  its  work 
the  carriers  might  voluntarily  enter  into  consolidations  con- 
forming to  the  Commission's  final  plan.  The  long-and-short- 
haul  rule  of  the  fourth  section  of  the  Interstate  Commerce  Act 
was  amended,  though  the  general  principle  adopted  in  1910 
was  retained.  The  Cummins  amendment  governing  the  estab- 
lishment of  rules  with  respect-to  the  liability  of  the  carriers  for 
lost  and  damaged  freight  was  again  modified,  to  give  added 
protection  to  shippers.  The  long-continued  agitation  for  Fed- 
eral regulation  of  railroad  capitalization  at  last  bore  fruit, 
the  new  law  requiring  carriers  desiring  to  issue  securities  to 
obtain  the  approval  of  all  proposed  issues  by  the  Interstate 
Commerce  Commission.  Unwise  and  unnecessary  extension  of 
railroad  facilities  was  guarded  against  by  requiring  companies 
contemplating  the  construction  of  new  lines  to  secure  from  the 
Interstate  Commerce  Commission  a  certificate  of  public  con- 


I ■     ■-.'-■ 


RAILROAD  REGULATION  273 

venience  and  necessity.  Likewise  it  was  provided  that  the 
abandonment  of  existing  railroad  facilities  could  not  take  place 
without  the  consent  of  the  Commission. 

The  membership  of  the  Commission  was  increased  from  nine 
to  eleven.  In  addition  to  receiving  the  new  powers  previously 
mentioned,  the  Commission  was  authorized  to'  establish  mini- 
mum as  well  as  maximum  rates ;  it  was  given  a  larger  degree 
of  control  of  car  service,  and  authority  to  direct  the  routing 
and  distribution  of  traffic  in  times  of  emergency.  It  was 
empowered  to  require  a  carrier  to  permit  the  use  of  its  terminal 
facilities  by  other  carriers,  to  prescribe  equitable  divisions  of 
joint  earnings,  to<  direct  the  routing  beyond  the  lines  of  initial 
carriers  of  traffic  not  routed  by  shippers,  and  to  exercise  a 
closer  supervision  over  railroad  accounts  and  records.  In 
one  respect  the  authority  of  the  Commission  was  curtailed,  the 
time  of  suspension  of  proposed  changes  in  rates  being  reduced 
from  120  days  and  an  additional  period  of  six  months  to  120 
days  and  an  additional  period  of  30  days. 

In  addition  to  establishing  a  new  system  of  railroad  regu- 
lation the  Transportation  Act  made  provision  for  the  adjust- 
ment of  the  financial  relations  of  the  railroads  and  the 
government,  gave  to  such  carriers  as  chose  to  accept  it 
a  guaranty  of  net  earnings  for  the  six  months  following  March 
1,  1920,  equal  to  one-half  the  annual  rental  paid  by  the  gov- 
ernment during  the  period  of  Federal  control,  and  appropriated 
$300,000,000  out  of  which  railroad  companies  might  secure 
loans  during  the  first  two  years  of  private  operation. 

The  twenty-six  months  that  have  passed  since  the  enactment 
of  the  Transportation  Act  have  witnessed  a  trial  of  virtually  all 
those  provisions  of  the  law  which  marked  a  departure  from 
the  former  railroad  policy.  While  conditions  have  not  been 
such  as  to  permit  a  thoroughly  adequate  test  of  the  law,  there 
has  been  sufficient  experience  to  make  possible  an  estimate 
of  its  merits  and  defects. 

Public  interest  has  centered  naturally  upon  the  events  con- 
nected with  the  three  most  important  features  of  the  Act, 
those  having  to  do  with  the  application  of  the  rule  of  rate- 
making,  the  regulation  of  state  rates  by  Federal  authority,  and 
the  work  of  the  Railroad  Labor  Board.  The  operation  of 
other  portions  of  the  law  has  not,  however,  been  attended  with 


274  RAILROADS  AND  BUSINESS  PROSPERITY 

insignificant  results.  The  Interstate  Commerce  Commission 
made  exceedingly  effective  use  of  its  increased  powers  over 
car  service  during  the  months  immediately  following  the 
termination  of  Federal  control,  when  the  freight  business  of 
the  railroads  was  unusually  heavy.  The  regulation  of  the 
issuance  of  securities  by  the  Commission  has  done  much,  on 
the  whole,  to  allay  the  fear  of  a  recurrence  of  the  financial 
operations  which  in  past  years  brought  disaster  to  owners  of 
railroad  stocks  and  bonds.  The  Commission  has  published  its 
tentative  plan  of  railroad  consolidation,  following  the  plan 
prepared,  at  the  Commission's  direction,  by  Professor  William 
Z.  Ripley  of  Harvard  University.  New  forms  of  bills  of 
lading  for  domestic  and  export  freight  have  been  adopted, 
defining  more  clearly  the  exact  nature  of  the  legal  obligations 
of  carriers  and  shippers.  The  promulgation  of  numerous  or- 
ders suspending  and  cancelling  railroad  tariffs  providing  for 
reductions  in  charges  indicates  that  the  Commission  is  making 
use  of  its  new  power  to  establish  minimum  charges. 

One  of  the  first  important  duties  which  confronted  the  Com- 
mission, under  the  terms  of  the  Transportation  Act,  was  to 
endeavor  to  establish  a  level  of  railroad  charges  sufficiently 
high  to  give  the  carriers  a  fair  rate  of  return.  The  law  stipu- 
lated that  for  the  two  years  following  March  1,  1920,  the  Com- 
mission should  take  as  a  fair  rate  of  return  a  sum  equal  to 
5*/2  per  cent  of  the  value  of  the  carriers'  property,  to  which 
might  be  added,  in  the  discretion  of  the  Commission,  one-half 
of  one  per  cent,  to  provide  for  additions  and  improvements. 
Late  in  July,  1920,  the  Commission  ordered  a  horizontal  in- 
crease of  interstate  freight  rates  and  passenger  fares.  Four 
rate  territories  were  designated,  an  Eastern,  a  Southern,  a 
Western,  and  a  Mountain-Pacific.  In  the  Eastern  territory 
the  increase  of  charges  for  the  transportation  of  freight  was 
40  per  cent,  in  the  Western  district  35  per  cent,  and  in  each 
of  the  other  two  regions  25  per  cent.  A  twenty-per-cent  in- 
crease of  passenger  fares  was  authorized,  and  a  surcharge  of 
50  per  cent  imposed  upon  Pullman  fares,  the  proceeds  to  go 
to  the  railroad  companies. 

After  the  authorization  of  the  increase  of  interstate  charges 
the  railroad  companies  asked  the  various  state  railroad  and 
utility    commissions    to    authorize    equivalent    increases    upon 


RAILROAD  REGULATION  275 

intrastate  traffic.  In  some  states  the  applications  of  the  carriers 
were  granted,  in  some  they  were  denied  with  respect  to  pas- 
senger fares  and  granted  with  respect  to  freight  rates,  and  in 
other  states  the  application  met  with  refusals  to  permit  any 
increase  of  a  substantial  nature.  The  carriers  appealed  to  the 
Interstate  Commerce  Commission  to  order  an  increase  in  intra- 
state charges,  where  such  increases  had  been  denied  by  state 
authorities,  upon  the  ground  that  the  disparity  between  inter- 
state and  intrastate  rates  resulted  in  an  undue  discrimination 
against  interstate  commerce.  The  Commission  acceded  to 
the  request  of  the  carriers,  and  in  a  series  of  notable. decisions 
ordered  an  increase  of  intrastate  rates  and  fares  corresponding 
in  general  to  the  increases  which  it  had  previously  author- 
ized on  interstate  business.  A  number  of  states  challenged 
the  power  of  the  Commission  to  increase  the  general  level  of 
intrastate  rates.  In  a  test  case  involving  the  order  made  with 
regard  to  rates  in  Wisconsin  the  Supreme  Court  upheld  the 
action  of  the  Commission,  vindicating  its  right  to  alter  intra- 
state rates,  not  only  when  there  was  discrimination  against 
a  particular  person  or  locality,  but  when  it  should  find  state 
rates  so  low,  compared  with  interstate  rates,  as  to  prevent  the 
carriers  from  earning  from  their  intrastate  business  a  reason- 
able proportion  of  the  revenue  to  which,  under  the  terms  of 
the  Transportation  Act,  they  are  entitled. 

Of  equal  importance  with  the  rate-making  activities  of 
the  Interstate  Commerce  Commission  has  been  the  work  of 
the  Railroad  Labor  Board.  For  some  time  before  the  Trans- 
portation Act  was  passed  there  was  much  unrest  in  the  ranks 
of  railroad  labor.  Prices  had  advanced  immoderately  since 
1915,  and  while  the  United  States  Railroad  Administration 
had  been  generous  in  its  treatment  of  labor,  the  workers  felt 
that  the  advance  in  the  rate  of  compensation  had  not  been  com- 
mensurate with  the  increase  in  the  cost  of  living.  Local  dis- 
turbances seriously  impeded  the  operation  of  the  railroads 
during  the  closing  months  of  Federal  control,  and  a  general 
stoppage  of  work  was  averted  in  the  spring  of  1920  only  be- 
cause of  the  prospect  of  a  speedy  consideration  of  the  wage 
situation  by  the  Railroad  Labor  Board.  Immediately  after 
the  Board  was  organized  it  undertook  a  settlement  of  the 
wages  question,  and  on  July  20,  1920,  it  rendered  a  decision 
granting  to  all  classes  of  railroad  labor  a  substantial  increase 


276  RAILROADS  AND  BUSINESS  PROSPERITY 

of  wages,  retroactive  to  May  1.  By  this  decision  the  annual 
outlay  of  the  carriers  for  wages  was  advanced  twenty-two  per 
cent.  In  the  fall  of  1920  the  railroads  found  it  necessary  to 
take  steps  to  reduce  expenses.  The  business  depression  which 
had  begun  in  the  summer  caused  a  marked  decline  in  the 
volume  of  railroad  traffic,  and  the  increased  rates  granted  by 
the  Interstate  Commerce  Commission  fell  far  short  of  supply- 
ing the  fair  return  of  six  per  cent  authorized  by  the  Trans- 
portation Act.  The  Labor  Board  was  asked  not  only  to 
authorize  a  reduction  of  wages,  but  to  abrogate  the  working 
rules  and  agreements  which  had  been  inherited  from  the 
Railroad  Administration,  and  which  the  carriers  asserted  to 
be  the  cause  of  large  annual  losses.  In  1921  the  Labor  Board 
authorized  a  twelve-per-cent  reduction  of  wages,  and  it  also 
ordered  new  working  agreements  to  be  adopted  to  replace  those 
put  into  effect  during  the  period  of  Federal  control.  During 
the  short  time  of  its  existence  the  Board  has  been  exceedingly 
active,  handing  down  numerous  decisions  affecting  the  entire 
railroad  service,  and  issuing  many  orders  with  respect  to  dis- 
putes on  the  lines  of  individual  carriers.  One  of  its  most 
noteworthy  achievements  was  the  effective  part  it  took  in 
averting  the  threatened  railroad  strike  in  October,  1921. 

The  operation  of  the  Transportation  Act  has  evoked  a 
great  deal  of  criticism.  It  was  unfortunate  that  the  law  had 
its  earliest  trial  during  a  period  of  business  depression.  It  was 
particularly  unfortunate  that  the  large  rate  increases  granted 
by  the  Interstate  Commerce  Commission  came  at  a  time  when 
the  general  level  of  commodity  prices,  and  especially  of  the 
prices  of  farm  products,  was  steadily  declining.  While  there 
is  little  ground  for  the  belief  that  the  increase  of  transportation 
rates  contributed  in  any  marked  degree  to  the  business  de- 
pression, it  was  inevitable  that  in  many  quarters  the  new  rates 
should  be  held  as  the  primary  cause  of  the  hard  times.  There 
have  been  many  demands  for  the  unconditional  repeal  of  the 
entire  rule  of  rate-making,  and  there  has  also  been  an  unfor- 
tunate tendency  to  encourage  interference  with  the  work  of 
the  Interstate  Commerce  Commission  by  legislative  and  execu- 
tive officials.  The  work  which  the  Commission  has  done  in 
the  readjustment  of  rates  believed  to  be  unreasonably  high  and 
the  recent  partial  revival  of  business  have  done  much,  how- 
ever, to  still  the  criticism  of  the  rate-making  provisions  of  the 


RAILROAD  REGULATION  277 

Transportation  Act.  So  far  there  has  been  no  recapture  of 
excess  earnings  from  individual  carriers,  though  the  Com- 
mission is  now  preparing  to  undertake  this  work.  It  is  highly 
probable  that  the  railroads  affected  will  challenge  the  constitu- 
tionality of  this  feature  of  the  law.  The  carriers  of  trunk  line 
and  of  central  freight  association  territories  have  already  called 
into  question  the  legal  right  of  the  Commission  to  order  a 
general  readjustment  of  the  divisions  of  joint  earnings. 

The  invasion  by  the  Federal  Government  of  the  right  previ- 
ously exercised  by  states  to  regulate  intrastate  commerce  has 
been  more  sharply  criticised  than  the  rule  of  rate-making,  and 
an  attempt  is  being  made  to  modify  that  portion  of  the  law 
which,  according  to  the  Supreme  Court,  gives  the  Interstate 
Commerce  Commission  authority  to  adjust  the  general  level  of 
intrastate  rates  in  accordance  with  the  needs  of  the  carriers 
for  revenue.  Senator  Cummins  has  said  that  it  was  not  the 
intention  of  the  framers  of  the  law  to  give  to  the  Commission 
such  sweeping  power,  it  being  thought  that  the  law  would 
permit  the  Commission  to  modify  intrastate  rates  only  in  cases 
where  the  disparity  between  state  and  interstate  charges  re- 
sulted in  discrimination  against  particular  individuals  or  par- 
ticular localities. 

The  chief  criticism  of  the  Transportation  Act  has  been  in 
connection  with  the  provisions  for  the  adjustment  of  labor 
troubles.  The  Labor  Board  has  met  with  a  comparatively  small 
measure  of  public  approval,  and  it  has  not  been  looked  upon 
with  great  favor  either  by  the  railroad  managers  or  by  the 
railroad  employees.  Railroad  labor  unions  have  achieved  a 
position  of  much  strength  in  recent  years  by  virtue  of  the 
Adamson  Law  and  because  of  the  deferential  policy  of  the 
Railroad  Administration.  They  have  a  feeling  of  confidence 
in  their  power  to-  bring  to  a  successful  issue  a  contest  with 
the  railroad  managers,  and  consequently  they  are  inclined  to 
regard  with  disfavor  the  creation  of  arbitration  tribunals  of 
any  character.  Because  of  the  business  depression  the  rail- 
road managers  have  a  large  measure  of  confidence  in  their 
ability  to  dictate  terms  to  their  working  forces  in  case  of  a 
strike,  and  many  of  them  feel  that  the  Labor  Board  is  an  im- 
pediment to  the  speedy  readjustment  of  wages  and  working 
rules  which  in  their  opinion  the  present  condition  of  the  trans- 
portation  industry  justifies.      The   difference   of   opinion   be- 


278  RAILROADS  AND  BUSINESS  PROSPERITY 

tween  railroad  executives  and  the  Board  as  to  the  scope  of  the 
Board's  jurisdiction  has  tended  to  prevent  the  new  tribunal 
from  exercising  the  influence  that  was  expected.  The  public, 
on  the  whole,  has  been  impressed  with  the  fact  that  the  scale 
of  wages  of  railroad  workers  has  not  declined  so  rapidly  as 
the  scale  of  wages  of  workers  in  other  industries,  and  feeling 
that  high  wages  have  been  largely  responsible  for  high  rail- 
road rates,  it  has  been  inclined  to  condemn  the  Railroad  Labor 
Board  for  failure  to  bring  about  a  more  expeditious  reduction 
of  railroad  expenses.  The  effective  action  of  the  Board  at  the 
time  of  the  threatened  strike  in  October,  1921,  tended,  how- 
ever, greatly  to  increase  its  prestige,  and  gained  for  it  many 
more  friends  than  it  had  previously  possessed.  Perhaps  the 
greatest  pretext  for  criticism  of  the  Labor  Board,  both  by  the 
carriers  and  by  the  public,  has  been  the  fact  that  the  control  of 
railroad  wages  has  been  entrusted  to  one  administrative  body 
and  the  control  of  rates  to  another,  without  specific  provision 
for  close  cooperation  between  the  two.  The  demand  for  the 
unconditional  abolition  of  the  Labor  Board  has  not  been  so 
urgent  as  the  demand  that  the  Board  be  abolished  and  its 
functions  vested  in  the  Interstate  Commerce  Commission. 

It  is  not  improbable  that  the  Transportation  Act  will  be 
modified  in  the  not  distant  future,  though  with  the  partial 
recovery  of  business  and  the  gradual  improvement  of  the 
financial  position  of  the  carriers  the  opinion  is  unquestionably 
gaining  strength  that  it  would  be  well  to  leave  the  law  un- 
disturbed for  a  time  in  order  to  see  how  it  will  function  under 
more  nearly  normal  conditions  of  business  than  have  prevailed 
during  the  past  two  years.  At  any  rate  it  is  not  to  be  ex- 
pected that  the  law  will  be  changed  as  extensively  as  its  sever- 
est critics  desire.  It  must  be^remembered  that  if  the  law  is 
amended  merely  so  as  to  eliminate  its  three  most  important 
features  the  country  will  be  thrown  back  upon  virtually  the 
same  railroad  policy  that  existed  in  1917.  One  has  only  to 
remember  the  almost  universal  condemnation  of  that  policy 
to  understand  how  unwise  it  would  be  to  return  to  it.  What- 
ever has  been  the  criticism  of  the  Transportation  Act  there  are 
few  who  will  not  admit  that  the  policy  which  it  embodies  is 
superior  to  the  former  railroad  policy.  The  general  accept- 
ance of  this  fact  affords  strong  basis  for  the  belief  that  there 
will  be  no  hasty  and  ill-considered  changes. 


RAILROAD  LABOR  AND  THE  LABOR  PROBLEM 

HENRY  R.  SEAGER 
Professor  of  Political  Economy,  Columbia  University 

THE  primary  purpose  of  the  Academy  of  Political  Science 
is  educational.  It  was  founded  in  recognition  of  the 
fact  that  there  is  a  large  and  growing  body  of  Ameri- 
cans who  wish  really  to  understand  both  sides  of  the  questions 
that  concern  us  as  citizens.  As  a  contribution  to  our  educa- 
tional program  these  meetings  to  discuss  the  Railroads  and 
Business  Prosperity  are  especially  significant.  They  are  a 
deliberately  planned  follow-up  of  the  similar  meetings  which 
the  Academy  held  in  November,  1919,  on  Railroad  Legislation. 

At  that  time,  as  you  will  all  recall,  Congress  was  wrestling 
with  the  problem  of  the  terms  on  which  the  railroads  should 
be  turned  back  to  their  owners.  The  sessions  of  the  Academy 
then  held  dealt  with  every  important  phase  of  that  subject. 
Senator  Cummins  explained  the  virtues  of  his  bill.  Repre- 
sentative Merritt  told  why  the  House  bill,  the  Esch  Bill,  was 
a  better  measure.  An  interstate  commerce  commissioner,  rail- 
road executives,  railroad  labor  union  officials,  spokesmen  for 
shippers,  for  the  stockholders  and  for  the  public,  and  the  in- 
evitable professors,  were  all  given  opportunity  to  present  their 
views.  There  resulted  a  volume  of  Proceedings  which  contri- 
buted greatly  to  the  enlightenment  of  our  members,  of  the 
public,  and  even  of  Congress,  as  the  good  features — I  will  say 
nothing  of  the  others — of  the  Transportation  Act  of  1920, 
which  soon  followed,  clearly  demonstrated. 

Today  we  come  together  to  appraise  that  measure  in  actual 
operation.  As  two  years  ago,  so  today,  we  are  still  confronted 
by  the  railroad  labor  problem  as  the  most  difficult  aspect  of  the 
whole  railroad  question.  I  have  been  asked  to  relate  the 
problem  to  the  labor  problem  in  general.  The  relation  seems 
to  me  so  obvious  that  I  need  take  but  a  few  minutes  of  your 
time  to  characterize  it. 

The  railroads  have  long  been  recognized  as  a  business  "  af- 
fected with  a  public  interest  ",  a  "  public  utility  ",  as  the  phrase 

279 


280  RAILROADS  AND  BUSINESS  PROSPERITY 

goes.  This  means  that  while  their  business  is  not  government 
business  it  is  also  not  strictly  private  business.  In  recognition 
of  its  quasi-public  nature  we  began  thirty-five  years  ago  to 
subject  the  charges  they  might  impose  and  the  quality  of  service 
they  must  render  to  regulation  through  the  Interstate  Com- 
merce Commission.  Just  as  the  railroads  occupy  a  middle 
ground  between  public  business  and  private  business,  so  rail- 
road employees  occupy  a  middle  position  between  public  em- 
ployees and  private  employees.  We  have  been  very  slow  in 
realizing  just  what  this  implies.  For  many  years  we  placed 
sole  reliance  on  mediation  and  voluntary  arbitration  to  adjust 
railroad  labor  disputes.  Even  the  Transportation  Act,  while 
creating  the  Railroad  Labor  Board,  is  vague  in  its  definition 
of  the  powers  of  this  Board  and  provides  no  adequate  sanction 
for  the  enforcement  of  the  Board's  decisions. 

This  deliberation  in  recognizing  the  quasi-public  nature  of 
railway  employment  and  extending  to  railway  employees  some 
of  the  protection  as  regards  certainty  and  continuity  of  status 
and  some  of  the  responsibility  as  regards  regularity  in  the 
performance  of  their  duties  that  apply  to  public  employees, 
reflects  the  difficulty  of  the  problem.  It  is  well  that  we  are 
taking  ample  time  to  settle  the  railroad  labor  problem.  It  is 
helpful  that  the  timid  steps  toward  an  adequate  railroad  labor 
policy  in  the  Transportation  Act  are  being  subjected  to  judicial 
review,  even  if  some  of  the  decisions  seem  to  weaken  rather 
than  to  strengthen  the  labor  provisions  of  that  measure.  The 
goal  to  be  aimed  at  is  coming  to  be  more  and  more  clearly 
perceived  by  all  concerned.  As  regards  the  public  it  is  maxi- 
mum efficiency  on  the  part  of  the  railroad  employees  and  pro- 
tection against  the  interruption  of  railroad  service;  as  regards 
the  employees  it  is  the  "  just  and"  reasonable  "  wages  and  work- 
ing conditions  prescribed  by  the  Transportation  Act,  coupled 
with  such  participation  in  the  determination  of  those  con- 
ditions as  will  call  forth  loyal  and  efficient  service;  as  regards 
railroad  executives  it  is  such  degree  of  control  over  the  oper- 
ation of  the  railroads  as  will  enable  them  to  do  their  work 
efficiently  and  to  secure  the  most  loyal  and  efficient  cooperation 
of  their  fellow  employees.  As  regards  the  owners  of  railroad 
securities  it  is  such  an  adjustment  of  labor  costs  to  revenues 
as  will  afford  them  a  fair  and  reasonable  return  on  their  bona- 
ride  investments. 


RAILROAD  LABOR  AND  THE  LABOR  PROBLEM  281 

I  shall  not  anticipate  the  speakers  who  succeed  me  by  at- 
tempting to  say  how  this  goal  is  to  be  attained.  But,  con- 
sidering together  these  different  aims,  there  are  two  principles 
which  in  the  future  development  of  our  railroad  labor  policy 
should,  in  my  judgment,  receive  clearer  recognition.  The 
first  is  the  principle  that  the  operating  employees  and  the 
shop  employees  present  separate  and  distinct  problems.  Con- 
tinuous service  on  the  part  of  the  operating  employees  on 
every  division  of  every  railroad  system  in  the  country  is  essen- 
tial to  the  public  welfare.  This  is  not  true  of  the  shop 
employees  of  any  railroad.  In  my  opinion  only  harm  and 
confusion  have  resulted  from  trying  to  apply  exactly  the  same 
method  for  adjusting  disputes  to  the  operating  employees  and 
to  the  shop  employees.  Operating  employees  are  quasi-public 
employees  in  a  sense  that  entitles  them,  in  return  for  guarantees 
of  continuous  service,  to  a  definite  and  fully  protected  status. 
Shop  employees  are  little,  if  at  all,  different  as  regards  the 
importance  of  the  services  they  render  from  private  employees 
in  the  many  private  plants  which  do  the  same  work  for  the 
railroads  in  some  sections  of  the  country  that  is  done  by  the 
railroad  shops  in  other  sections.  As  I  am  a  strong  believer  in 
leaving  labor  questions  to  voluntary  adjustment,  under  proper 
safeguards  protecting  the  right  of  the  individual  employee  to 
organize,  I  do  not  believe  that  any  useful  purpose  would  be 
served  by  restricting  the  right  of  shop  employees  to  strike 
should  they  desire,  at  any  rate,  unless  and  until  we  come  to 
adopt  such  a  policy  for  other  employees  in  manufacturing  and 
repair  plants.  On  the  other  hand,  if  the  operating  employees 
should  ever  again  attempt  to  exercise  the  right  to  strike,  which 
they  enjoy,  there  are  clear  indications  that  public  opinion 
would  demand  its  curtailment.  Such  curtailment  would  be 
fair  and  proper  only  if  it  were  coupled  with  the  adoption  of 
standards  as  regards  wages  and  working  conditions  and  con- 
tinuity of  employment  that  made  the  use  of  the  strike  weapon 
clearly  no  longer  necessary  as  a  means  of  securing  the  just  and 
reasonable  conditions,  which  the  Transportation  Act  prescribes. 

The  other  principle  is  that  whatever  public  authority  is 
charged  with  adjusting  disputes  involving  the  operating  em- 
ployees, it  must  recognize  that  it  is  its  duty  to  seek  and  find 
some  other  and  better  basis  for  determining  wages  and  work- 


282  RAILROADS  AND  BUSINESS  PROSPERITY 

ing  conditions  than  reliance  on  settlements  that  may  be  im- 
posed by  railroad  executives  through  their  superior  power,  or 
that  may  be  wrung  from  such  executives  because  of  the  superior 
power  of  the  organized  employees.  From  this  point  of  view 
the  statement  with  which  the  Railroad  Labor  Board  prefaced 
the  first  wage  decision  which  it  rendered  on  July  20,  1920, 
advancing  wages  for  the  collective  railroad  employees  of  the 
country,  was  highly  disappointing.  It  said:  "  The  Board  has 
been  unable  to  find  any  formula  which,  applied  to  the  facts, 
would  work  out  a  just  and  reasonable  wage  for  the  many 
thousands  of  positions  involved  in  this  dispute."  The  ob- 
jection to  this  statement  is  not  that  it  would  have  been  reason- 
able to  expect  the  Board  to  find  such  a  formula  after  its  few 
weeks'  study  of  the  problem  but  that  it  implies  that  no  such 
formula  or  formulae  are  to  be  found.  If,  instead  of  contenting 
itself  with  such  a  pessimistic  utterance  as  regards  the  possi- 
bility of  placing  its  decisions  on  a  scientific  and  defensible 
basis,  it  had  recognized  the  grounds  for  distinguishing  between 
operating  employees  and  shop  employees,  and  indicated  its 
determination  to  seek  a  proper  basis  for  the  determination  of 
the  wages  and  working  conditions  of  operating  employees,  so 
that  in  its  decisions  rules  would  in  time  be  laid  down  which 
would  justify  curtailing  the  right  of  operating  employees  to 
interrupt  the  railroad  service  of  the  country,  the  public  would 
now  entertain  a  much  higher  opinion  of  the  Board  and  much 
greater  confidence  in  its  ability  to  lead  in  the  solution  of  the 
railroad  labor  problem. 


FUNCTIONS  AND  POLICIES  OF  THE  RAILROAD 

LABOR  BOARD 

FRANK  H.  DIXON 
Professor  of  Economics,  Princeton  University 

AS  a  background  for  our  discussion  it  may  be  profitable 
to  recall  the  more  significant  provisions  of  the  Trans- 
portation Act  of  1920  relating  to  labor — that  portion 
enacted  under  the  title  "  Disputes  between  Carriers  and  their 
Employees  and  Subordinate  Officers ".  The  fundamental 
purpose  of  this  portion  of  the  statute  is  revealed  in  the  first 
sentence  of  Section  301,  which  declares  it  to  be  the  duty  of  all 
carriers  and  their  officers  and  agents  to  exert  every  reasonable 
effort  and  adopt  every  available  means  to  avoid  any  inter- 
ruption to  operation  growing  out  of  a  dispute  between  carrier 
and  employees.  Uninterrupted  transportation  is  essential  to 
the  life  and  happiness  of  the  people  and  it  is  wholly  proper 
that  this  thought  should  be  kept  in  the  forefront  of  any  legis- 
lation concerning  labor  controversies  on  the  railways  of  the 
country. 

Following  this  general  injunction  the  specific  plan  is  de- 
veloped. All  disputes  must  be  considered,  and  if  possible, 
must  be  decided  in  conference  between  authorized  representa- 
tives of  those  directly  interested  in  the  dispute.  This  initial 
conference  usually  would  take  place  on  the  individual  railway, 
but  if  the  dispute  were  of  wider  extent,  it  might  conceivably 
involve  many  carriers.  Failure  to  reach  a  decision  in  such 
a  conference  is  provided  for  by  boards  of  reference  to  which 
the  controversy  may  be  sent. 

In  the  first  place,  there  are  the  Railroad  Boards  of  Labor 

Adjustment.     These  boards  may  be  established  by  agreement 

between  carriers  and  employees.     They  may  be  limited  to  a 

single  line,  to  a  group  of  carriers,  or  they  may  comprise  the 

carriers  as  a  whole.     They  are  to  be  bipartisan  in  character. 

Their  jurisdiction  is  an  appellate  one,  and  covers  only  such 

disputes  as   involve  grievances,   rules   or  working  conditions, 

but  not  wages.     Such  a  board,  when  set  up,  receives  for  hear- 

283 


284  RAILROADS  AND  BUSINESS  PROSPERITY 


ing 


any  dispute  not  settled  by  local  conference,  upon  the  appli- 
cation of  any  carrier  or  employee  organization,  or  the  petition 
of  not  less  than  one  hundred  unorganized  employees.  Further- 
more, this  Board  either  on  its  own  initiative  or  upon  the 
request  of  the  national  Labor  Board,  may  take  jurisdiction 
whenever  it  is-  of  the  opinion  that  the  dispute  is  likely  sub- 
stantially to  interrupt  commerce. 

Finally,  at  the  apex  of  the  pyramid  is  the  Railroad  Labor 
Board,  an  arbitration  body  consisting  of  three  representatives 
each  of  labor,  the  carriers  and  the  public.  It  takes  jurisdiction 
of  disputes  concerning  working  conditions  not  settled  by  Ad- 
justment Boards  or  concerning  which  it  decides  that  Adjust- 
ment Boards  have  not  exhibited  due  diligence.  In  case  no 
Adjustment  Board  has  been  organized,  it  takes  the  place  of 
this  subordinate  body  and  receives  the  dispute  on  appeal 
directly  from  the  local  conference. 

So  far  as  wage  disputes  are  concerned,  the  Railroad  Labor 
Board  assumes  direct  jurisdiction  on  appeal  from  the  local 
conference  without  the  intermediation  of  any  Adjustment 
Board.  And  it  may  go  further  and  upon  its  own  initiative 
suspend  the  operation  of  any  original  decision  concerning 
wages  made  locally,  if  it  is  of  the  opinion  that  the  decision 
involves  such  an  increase  as  will  be  likely  to  necessitate  a  sub- 
stantial readjustment  of  the  rates  of  any  carrier.  Decisions 
are  to  be  made  public  by  transmittal  to  the  President  and  to 
the  Commission.  If  an  order  of  the  Board  is  disobeyed,  it  may 
hear  and  determine  the  violation  and  make  public  its  finding. 
But  it  has  no  weapon  of  enforcement  beyond  that  of  publicity. 

This  Board  has  been  in  existence  for  nearly  two  years,  long 
enough  to  develop  its  policy  at  least  in  outline  and  give  indi- 
cation of  what  are  to  be  its  "fundamental  guiding  principles. 
Certainly  it  has  had  a  sufficiently  varied  experience  during  its 
brief  and  busy  life  to  prevent  it  from  sinking  to  the  level  of 
bureaucratic  routine.  Catapulted  into  the  midst  of  a  situation 
seething  with  discontent  and  threatened  outbreak,  the  Labor 
Board  was  compelled  at  the  beginning  to  act  under  pressure 
and  without  that  deliberation  that  should  characterize  the 
decisions  of  a  judicial  body.  And  working  under  pressure 
has  been  the  habit  of  the  Board  almost  continuously  since  the 
beginning.       It  may  have  made  some  mistakes.       It  certainly 


THE  RAILROAD  LABOR  BOARD  285 

has  not  met  with  universal  approbation.  But  its  work  should 
be  judged  with  due  consideration  of  the  conditions  under 
which  the  Board  was  created  and  under  which  it  has  been 
compelled  to  work. 

In  the  determination  of  the  reasonableness  of  wages  it  was 
under  the  guidance  of  Congress,  which  laid  down  seven  con- 
ditions that  were  to'  be  taken  into  consideration.  Hazard, 
skill  and  responsibility  were  obvious  factors,  as  were  character 
and  regularity  of  employment.  Inequalities  in  previous  wage 
adjustments  were  certainly  pertinent  considerations,  for  until 
the  wage  base  was  determined  to  be  sound  and  fair,  no  increases 
or  decreases  therefrom  could  be  fairly  appraised.  But  the 
Board  naturally  shrank  from  an  investigation  that  would  con- 
sume much  valuable  time  and  carry  it  far  afield,  and  this  factor 
was  given  slight  attention.  Cost  of  living,  which  the  em- 
ployees use  as  an  argument  for  increases  when  prices  are  rising 
and  which  is  taken  over  by  the  carriers  when  the  tide  begins 
to  recede,  cannot  by  itself  determine  the  fundamental  reason- 
ableness of  an  existing  wage.  It  merely  indicates  the  desir- 
ability of  an  increase  or  a  decrease  from  some  assumed  stand- 
ard which  has  been  only  vaguely  fixed,  and  may  not  have  been 
reasonable  in  the  beginning.  It  is  worthy  of  note  that  Mr. 
Jewell  in  his  recent  presentation  before  the  Labor  Board  in 
behalf  of  the  shop  crafts,  challenged  the  whole  social  order 
and  based  his  plea  for  an  increase  of  existing  wage  rates  upon 
the  necessity  of  assuring  to  the  workers  an  American  standard 
of  living.  The  laborer  is  worthy  of  his  hire,  and  this  hire  must 
procure  for  him  the  opportunity  to  live  in  comparative  comfort 
without  reference  to  the  financial  condition  of  his  employer. 

No  mathematical  rule  has  been  discovered  for  the  deter- 
mination of  a  reasonable  wage.  But  so  long  as  we  maintain 
our  regime  of  private  industry,  one  of  the  determining  in- 
fluences that  must  be  accepted  by  any  wage-adjustment  board 
is  the  first-named  of  the  seven  conditions  listed  in  the  statute, 
"  the  scale  of  wages  paid  for  similar  kinds  of  work  in  other 
industries  ".  Granted  that  the  statistics  of  wages  have  been 
honestly  and  intelligently  gathered  and  that  no  manipulation 
of  wage  rates  has  occurred  through  undue  pressure  of  com- 
bined capital,  the  price  that  must  be  paid  for  similar  labor  in 
the  open  market  is  one  of  the  conclusive  factors  in  determining 


286  RAILROADS  AND  BUSINESS  PROSPERITY 

the  reasonableness  of  a  prevailing  wage  standard.  Moreover 
in  connection  therewith  the  Board  should  adjust  wages  in 
harmony  with  the  industrial  conditions  of  each  locality. 
Standardized  wages  effective  over  wide  areas  can  with  difficulty 
be  defended  on  any  economic  basis.  Their  reason  for  existence 
is  political  and  strategic.  Testimony  submitted  by  the  em- 
ployees themselves  in  Chicago  recently  is  a  virtual  recognition 
of  the  need  of  restoring  those  differentials  between  town  and 
city  and  between  one  section  and  another  that  were  largely 
destroyed  during  the  period  of  the  national  agreements. 

But  this  wage  the  carrier  should  pay  irrespective  of  its 
financial  condition.  Mr.  Jewell  is  fundamentally  on  solid 
ground  in  directing  the  attention  of  the  Board  to  the  standard 
of  living  of  the  laborer  and  away  from  the  railway's  ability 
to  pay.  It  is  not  only  unfair  but  also  unsound  to  make  the 
wages  of  the  employees  dependent  upon  the  prosperity  of  the 
carriers.  The  public  must  eventually  be  made  to  pay  what  is 
necessary  to  keep  capital  in  business  and  labor  adequately  re- 
warded. But  if  there  is  any  faltering  on  the  part  of  the 
public,  it  is  capital  that  must  bear  the  brunt,  not  labor.  Of 
course  there  are  instances,  and  some  of  them  have  been  recog- 
nized by  the  Labor  Board,  where  railway  operation  has  only 
been  possible  through  a  reduction  of  the  wage  standard,  but 
these  have  been  minor  instances  on  small  roads,  and  it  is  signi- 
ficant to  notice  that  in  the  case  of  the  Missouri  and  North 
Arkansas,  for  example,  the  Board  in  reducing  the  wrages  stipu- 
lated that  capital  should  receive  nothing  until  wages  had  been 
restored  to  standard. 

Overemphasis  has  been  put  upon  the  relationship  of  wages 
and  rates — the  argument  that  wages  depend  upon  the  ability  of 
the  carrier  to  pay — by  the  offer  of  the  railways  last  October 
to  translate  all  further  reductions  in  wages  into  rate  reductions. 
Why  such  an  offer  was  made  it  is  difficult  to  say.  Possibly  it 
was  a  strategic  move  to  enlist  the  shippers  on  the  side  of  wage 
reductions.  But  the  practical  value  of  the  offer  was  certainly 
insignificant.  The  effect  in  rate  reductions  of  a  decrease  of 
ten  per  cent  in  wages  would  be  so  small  that  it  would  scarcely 
be  recognized  even  if  it  had  immediate  effect  upon  the  move- 
ment of  traffic.  But  all  indications  point  to  the  conclusion 
that  reductions  in  rates  would  not  stimulate  traffic  movement 


THE  RAILROAD  LABOR  BOARD  287 

to  any  considerable  degree.  The  trouble  lies  in  the  business 
situation.  When  business  picks  up,  the  height  of  the  freight 
rate  will  be  in  large  measure  forgotten. 

Those  who  are  insisting  that  wages  depend  upon  rates  are 
urging  the  transfer  of  the  duties  of  the  Labor  Board  to  the 
Interstate  Commerce  Commission,  on  the  ground  that  the 
agency  that  determines  revenues  should  be  in  control  of 
expenses.  Their  arguments  are  not  impressive.  To^  be  sure, 
there  has  been  a  certain  amount  of  jolting  in  the  machinery  and 
the  two  agencies  have  not  worked  as  cooperatively  as  they 
might  have  done.  But  the  combination  of  the  two  functions 
in  the  one  body  would  not  solve  any  problem.  Wages  would 
still  have  to  be  considered  separately  and  ought  still  to  be 
considered  ahead  of  rates  if  any  conclusions  of  enduring  force 
are  to  be  reached.  And,  besides,  the  Commission  has  enough 
troubles  of  its  own. 

A  review  of  the  activities  of  the  Labor  Board  reveals  the 
fact  that  whereas  it  was  designed  as  an  appellate  body  to 
receive  only  such  controversies  as  could  not  be  settled  locally 
or  regionally,  which  presumably  would  be  few,  it  has  been  for 
most  of  its  life  largely  a  court  of  original  jurisdiction  because 
of  the  utter  failure  of  the  conference  and  adjustment  machinery 
to  produce  results.  It  is  probable  that  the  presence  of  the 
Labor  Board  works  as  a  deterrent  to  quick  settlement  in  con- 
ference. One  of  the  parties  feels  that  better  terms  may  be 
secured  by  appeal  and  so  declines  to  participate  in  a  local  ad- 
justment, or  else  makes  merely  a  perfunctory  effort  toward 
settlement.  The  result  has  been  to  bury  the  Board  in  petty 
issues  with  which  it  should  not  have  had  to  concern  itself. 
Unsettled  controversies  of  minor  character  carried  over  from 
the  federal  period  occupied  much  of  the  time  of  the  Board  at 
the  beginning.  The  failure  of  the  carriers  and  their  employees 
to  get  anywhere  in  the  revision  of  the  national  agreements 
threw  the  burden  of  readjustment  wholly  upon  the  shoulders 
of  the  Labor  Board. 

It  is  true  that  adjustment  boards  have  been  set  up  in  each 
of  the  three  territories,  but  thus  far  they  have  been  confined  to 
men  in  engine,  train,  and  yard  service,  and  have  included  only 
a  portion  of  the  carriers.  No  such  boards  have  been  created 
for  settling  the  problems  of  the  shop  crafts,  in  which  the  con- 


288  RAILROADS  AND  BUSINESS  PROSPERITY 

troversies  over  working  conditions  are  much  more  numerous 
than  in  train  service.  This  failure  of  carriers  and  shop  craft 
employees  to  set  up  adjustment  boards  is  in  part  due  to  the 
attitude  of  the  railways,  which  are  disposed  to  distinguish 
between  occupations  that  are  exclusively  railway  in  their  char- 
acter, and  those  that  are  similar  to  commercial  employment. 
Shopmen  are  merely  skilled  mechanics.  They  belong  to  unions 
associated  with  the  American  Federation  of  Labor  which 
contains  men  of  the  same  craft  employed  in  other  industries. 
Questions  of  policy  are  decided  by  vote  of  the  entire  union 
membership  and  railways  have  resented  the  idea  that  rules  for 
railway  shopmen  should  be  made  by  men  engaged  in  other  than 
railway  occupations. 

Nevertheless,  it  is  evident  that  means  should  be  devised  for 
encouraging  and  developing  the  type  of  local  conference  and 
adjustment  that  the  Act  contemplated.  Sound  principles  of 
labor  adjustment  demand  that  removal  of  misunderstandings 
and  elimination  of  grievances  should  be  undertaken  at  the 
bottom  and  not  at  the  top.  Local  conference  develops  a  loyalty 
to  the  individual  operating  organization  without  which  effi- 
ciency is  impossible.  Such  loyalty  is  peculiarly  needed  in  the 
railway  industry,  in  which  the  geographical  extent  of  oper- 
ations requires  the  scattering  of  employees  over  a  wide  territory 
where  they  are  thrown  largely  on  their  own  resources. 

It  becomes  a  question  whether  the  Labor  Board  has  used 
its  influence  as  vigorously  as  it  might  to  encourage  local  adjust- 
ment. Of  course  it  has  compelled  compliance  with  the  Act, 
which  has  required  local  conference  as  a  preliminary  to  an  ap- 
peal to  the  Board.  But  there  is  no  indication  that  it  has  been 
unwilling  to  accept  these  appeals  when  made.  Why  has  it 
not  followed  the  practice  of  The  court  which  sends  back  for 
further  deliberation  a  hung  jury?  Why  could  it  not  refuse 
to  hear  an  appeal  because  the  conference  was  obviously  per- 
functory? On  the  contrary,  in  the  present  wage  hearing,  in- 
stead of  passing  upon  the  merits  of  Mr.  Jewell's  plea  that 
genuine  conferences  had  not  been  held,  the  Board  postponed 
decision  on  this  issue  until  after  all  the  evidence  should  have 
been  offered  by  both  sides.  I  do  not  mean  to  argue  with  re- 
spect to  this  specific  issue  that  the  preliminary  conferences 
have  not  been  genuine.      Upon  that  I  express  no  opinion.      I 


THE  RAILROAD  LABOR  BOARD  289 

am  merely  insisting  that  the  Board's  general  attitude  does  not 
betoken  any  solicitude  for  the  preservation  and  the  enlargement 
of  the  powers  of  the  local  conference. 

In  fact,  there  is  much  to  lead  one  to  the  conclusion  that  the 
Board  is  magnifying  its  own  powers  and  is  extending  them 
into  that  field  which  should  be  the  exclusive  possession  of  the 
railway  executives.  To  discuss  this  issue  in  detail  would 
extend  this  introductory  paper  beyond  its  proper  limits.  The 
Board's  attitude  may  be  understood  by  brief  reference  to  a 
few  of  the  more  striking  cases.  In  an  issue  last  September  in 
which  a  carrier  discharged  a  man  because  he  belonged  to  a 
union  and  challenged  the  power  of  the  Board  to  interfere  in  a 
matter  of  contract  between  employer  and  employee,  the  Board 
held  that  it  was  required  to  take  jurisdiction  of  all  cases  not 
decided  elsewhere,  and  that  it  must  decide  all  disputes  that 
were  likely  to  interrupt  the  operation  of  the  carrier.  This  all- 
embracing  attitude  takes  out  of  the  hands  of  the  individual 
carrier  all  control  of  its  labor  relations  when  they  have  reached 
a  stage  in  conference  where  disagreement  has  resulted.  For 
of  course  any  disagreement  may  conceivably  develop  into  an 
interruption  of  traffic. 

Another  illustration  of  the  Board's  interpretation  of  its 
powers  is  found  in  the  Erie  Railroad  case,  in  which  the  carrier, 
after  conference  with  its  employees  resulting  in  a  disagreement, 
restored  the  rates  of  pay  in  effect  before  the  Labor  Board's 
decision  of  July,  1920.  The  Board  held  that  the  road  had  no 
authority  to  decide  when  new  conditions  warranted  a  change 
in  wages,  and  expressed  its  somewhat  heated  views  in  the 
following  langauge : 

This  position,  of  course,  renders  nugatory  and  vain  the  elaborate 
and  costly  processes  established  by  the  Act  and  applied  by  this  Board. 
It  sweeps  aside  at  the  will  of  one  party  a  decision  arrived  at  after  the 
presentation  of  evidence  and  argument  by  the  many  parties  to  the 
dispute,  accepted  by  all  and  now  obeyed  by  substantially  all  carriers. 
It  justifies  a  disregard  of  the  factors  specified  by  Congress  for  the 
ascertainment  of  just  and  reasonable  wages  and  substitutes  for  these 
factors  the  financial  benefit  of  the  carrier.  If  valid,  the  intent  of  Con- 
gress that  conference,  reasonableness  and  justice  should  be  substi- 
tuted for  power,  violence  and  disorder  in  the  settlement  of  railroad 
labor  disputes  is  utterly  destroyed  and  legislation  enacted  after  the 
most  careful  consideration  rendered  ridiculous  and  even  fraudulent. 
If  a  carrier  may  arbitrarily  reduce  wages  decided  to  be  reasonable  and 
set  aside  rules  while  a  party  to  proceedings  with  regard  to  such  rules, 
no  reason  appears  why  railroad  employees  may  not  announce  an  im- 
mediate  intention    of   abandoning   the   service    in    concert   unless    de- 


290  RAILROADS  AND  BUSINESS  PROSPERITY 

mands  for  increased  wages  or  more  favorable  working  conditions  are 
at  once  satisfied,  provided  a  trend  toward  higher  living  costs  shall 
have  appeared  or  wage  scales  in  similar  industries  shall  have  ad- 
vanced. Such  conduct  is  highly  provocative  of  interruption  to  traffic 
and  is  not  only  not  consistent  with  the  Act,  but  is  thereby  clearly 
condemned  and  prohibited. 

No  court  has.  passed  upon  this  question  because  the  carrier 
complied  with  the  ruling  of  the  Board,  but  it  is  the  particular 
feature  of  the  law  to  which  the  most  serious  objection  is  raised 
by  railway  management.  It  is  clear  that  under  this  inter- 
pretation, management  has  no  power  to  readjust  wages  with- 
out the  consent  of  the  employees,  and  if  that  is  withheld,  with- 
out a  hearing  and  a  decision  by  the  Labor  Board.  It  is  the 
contention  of  railway  management  that  it  should  have  original 
authority  to  adjust  wages,  its  action  to  be  subject  to  review  by 
the  Board,  which  should  have  power  to  make  its  findings  retro- 
active. Without  such  a  procedure,  wage-fixing  will  soon  be- 
come an   exclusively   governmental   function. 

Finally,  there  is  the  case  of  the  Pennsylvania  Railroad, 
which  is  too  familiar  to  need  elaboration  here.  The  Board 
went  further  in  this  instance  than  in  any  other  controversy 
of  which  it  has  taken  jurisdiction,  and  laid  down  general  rules 
of  procedure  which  the  railway  was  ordered  to  follow  in  choos- 
ing employee  representatives  to  confer  with  management  con- 
cerning a  plan  of  labor  adjustment.  The  Board  even  went 
so  far  as  to  prescribe  the  form  of  ballot  which  the  road  should 
use,  although  this  portion  of  the  order  was  later  modified.  But 
it  did  insist  upon  certain  principles  of  representation  with 
which  the  road  was  not  willing  to  comply.  In  this  respect  it 
apparently  exceeded  the  powers  granted  it  by  the  statute,  for 
it  has  within  the  past  fortnight  been  enjoined  by  the  Federal 
Court  from  enforcing  its  orders  against  the  carrier.  The  de- 
cision of  Judge  Page  virtually  forbade  the  Board  to  interfere 
with  the  procedure  of  the  carrier  which  set  up  a  scheme  of 
employee  representation  for  the  handling  of  local  grievances. 
[I  note  the  prompt  announcement  that  the  Labor  Board  proposes 
to  appeal  this  decision.  This,  of  course,  is  quite  proper  and 
quite  desirable  in  order  that  the  actual  powers  of  the  Labor 
Board  should  be  clearly  denned  by  a  higher  court.] 

However  much  we  may  as  individuals  sympathize  with  the 
underlying  purpose  that  inspired  the  Labor  Board — the  desire 


THE  RAILROAD  LABOR  BOARD  291 

to  permit  each  employee  to  be  represented  by  the  person  or  by 
the  organization  of  his  choice,  whether  this  person  or  organi- 
zation was  local  to  the  Pennsylvania  Railroad  or  not — we  must 
recognize  that  this  position  of  the  Labor  Board  invades  deeply 
the  field  of  management  and  is  one  more  step  in  the  direction 
of  robbing  the  railway  executive  of  that  initiative  which  is 
essential  to  efficient  operation. 

I  am  not  one  of  those  who  believe  that  the  Labor  Board 
should  be  abolished.  It  has  much  valuable  work  to  do  within 
its  proper  field.  Above  all  it  stands  for  the  settlement  of  labor 
problems  through  the  medium  of  arbitration  rather  than  that 
of  the  strike.  Uninterrupted  transportation,  which  is  at  the 
basis  of  the  present  law,  is  a  goal  which  we  must  steadily 
approach.  We  must  accustom  the  public  and  labor  to  the  idea 
of  arbitration  as  a  permanent  substitute  for  the  strike.  Capital 
and  labor  should  be  required  to  accept  service  in  this  industry 
subject  to  a  limitation  upon  their  freedom  of  action  in  the 
settlement  of  their  disputes.  There  would  have  been  no  jus- 
tice in  incorporating  compulsory  arbitration  into  law  in  March, 
1920,  and  imposing  restrictions  upon  employees  just  emerging 
from  government  employment,  into  which  they  had  been 
thrown  without  their  consent — employees  long  in  service  with 
valuable  seniority  rights  and  unfitted  by  age  and  experience 
for  any  other  employment.  But  the  public  should  announce 
a  future  policy  of  compulsory  arbitration,  with  the  purpose 
of  realizing  it  as  speedily  as  conditions  permit.  The  public 
must  assure  the  contestants  that  they  have  a  tribunal  in  which 
absolute  justice  will  be  meted  out.  Such  a  tribunal  must  offer 
a  compensation  and  a  tenure  sufficient  to  attract  the  most  com- 
petent men  the  country  can  produce.  It  must  establish  a  labor 
code  which  assures  to  labor  certain  fundamental  rights.  Such 
a  code  the  Board  itself  attempted  to  lay  down  last  July.  This 
code  has  not  met  with  universal  approval,  but  it  gives  at  least 
a  basis  for  discussion. 

There  is  not  opportunity  at  this  time  to  discuss  the  arguments 
for  and  against  compulsory  arbitration.  I  wish  only  in  reply 
to  those  who  insist  that  it  is  wholly  impracticable,  to  call 
attention  to  the  influence  exerted  by  the  Labor  Board  and  the 
labor  provision  of  the  statute  last  fall  in  preventing  a  nation- 
wide strike.      Notwithstanding  the  fact  that  the  law  contained 


292  RAILROADS  AND  BUSINESS  PROSPERITY 

no  sanctions  and  that  the  only  method  of  protest  left  for  labor 
against  the  decision  of  the  Board  was  the  use  of  the  strike 
weapon,  the  strike  did  not  take  place.  It  crumbled  because 
in  spite  of  all  explanations  and  protests,  labor  could  not  rid 
itself  of  the  odium  of  striking  against  the  decision  of  a  body 
created  by  law.  for  the  express  purpose  of  settling  disputes  of 
this  character.  Public  opinion  refused  to  endorse  lawlessness 
and  the  gigantic  structure  of  revolt  collapsed  like  a  house 
of  cards. 

With  the  rights  of  labor  adequately  protected  by  a  code 
sanctioned  by  law,  and  with  a  competent  and  high-minded 
arbitration  board,  there  should  be  no  more  inherent  difficulty 
in  settling  labor  disputes  peaceably  than  there  is  in  adjusting 
the  ordinary  dispute  in  courts  of  law.  The  cry  of  involuntary 
servitude,  under  such  circumstances,  is  not  persuasive.  Public 
policy  must  guarantee  justice  to  the  disputants  but  it  must 
also  protect  the  people  at  large  from  the  intolerable  burdens 
of  interrupted  transportation. 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT 

FROM  THE  POINT  OF  VIEW  OF  RAILWAY 

MANAGEMENT 

C.  B.  HEISERMAN 
General  Counsel  of  the  Pennsylvania  Railroad 

ADISGUSSION  of  the  labor  policies  of  the  Transpor- 
tation Act  from  the  point  of  view  of  railway  man- 
agement is  hardly  within  the  province  of  a  member 
of  a  railroad  legal  department,  but  I  shall  address  my  remarks 
simply  to  a  statement  of  facts  which  will  authoritatively  set 
forth  the  policy  of  the  company  which  I  have  the  honor  to 
serve,  and  some  phases  of  the  controversy  with  the  United 
States  Railroad  Labor  Board  which  led  to  our  appeal  to  the 
United  States  Court  at  Chicago. 

Section  301  of  the  Transportation  Act  declares  it  to  be  the 
duty  of  all  carriers  and  their  officers  and  employees  to  exert 
every  reasonable  effort  and  to  adopt  every  available  means  to 
avoid  any  interruption  in  the  operation  of  any  carrier  growing 
out  of  any  dispute  between  the  carrier  and  its  employees,  or 
its  subordinate  officials.  All  such  disputes  shall  be  considered 
and,  if  possible,  decided  in  conference  between  representatives 
designated  and  authorized  so  to  confer  by  the  carriers,  or 
employees,  or  subordinate  officials  thereof,  directly  interested 
in  the  dispute.  If  any  dispute  is  not  decided  in  such  confer- 
ence, it  shall  be  referred  by  the  parties  thereto  to  the  Board, 
which,  under  the  provisions  of  the  title,  is  authorized  to  hear 
and  decide  such  dispute. 

In  Decision  No.  119  the  Labor  Board  assumed  to  terminate 

the   National   Agreements,   and   called   upon   the   officers   and 

system  organizations  of  employees  to  designate  and  authorize 

representatives  to  confer  and  decide  so  much  of  the  disputes 

relating  to  working  rules  and  conditions  as  it  might  be  possible 

for  them  to  decide  in  conference,  although  no  dispute  as  to 

rules  and  working  conditions  had  been  referred  to  the  Board 

under  the  Transportation  Act.       To  this   decision  the  Board 

attached  and  assumed  to  prescribe  sixteen  principles  to  govern 

293 


294  RAILROADS  AND  BUSINESS  PROSPERITY 

such  conference  and  required  such  conference  to  conform 
thereto.  Principle  No.  5  declared  the  right  of  a  lawful  organi- 
zation to  act  towards  lawful  objects  through  representatives  of 
its  own  choice,  whether  such  representatives  were  employees 
of  the  carrier  or  not,  and  declared  further  that  the  carrier 
must  agree  to  such  principle. 

Principle  No.  15  declared  that  the  majority  of  any  craft 
or  class  of  employees  shall  have  the  right  to  determine  what 
organization  shall  represent  members  of  such  craft  or  class. 
Such  organization  shall  have  the  right  to  make  an  agreement 
which  shall  apply  to  all  employees  in  such  craft  or  class.  It 
was  provided,  however,  that  no  such  agreement  shall  infringe 
upon  the  right  of  employees  not  members  of  the  organization 
representing  the  majority  to  present  grievances  either  in  person 
or  by  representatives  of  their  own  choice. 

While  not  conceding  that  the  Labor  Board  had  at  any  time 
acquired  jurisdiction  over  the  National  Agreements,  or  that  it 
had  any  right  or  power  to  revive  and  perpetuate  the  same,  as  it 
did  in  Decision  No.  119,  or  that  it  had  power  to  prescribe  the 
principles  which  it  attached  to  said  Decision  No.  119,  the 
Pennsylvania  Railroad  Company  endeavored  to  comply  with 
the  said  decision  and  the  said  principles.  Though  not 
recognizing  any  obligation  so  to  do,  our  company  called  into 
conference  its  several  classes  of  employees  with  the  view  to 
negotiating  with  each  class,  respectively,  rules  and  working 
conditions  to  govern  and  control  the  relations  between  it  and 
its  employees,  in  lieu  of  the  National  Agreements,  which  had 
ceased  to  exist,  and  to  which  our  company  was  in  no  wise 
a  party. 

There  was  upon  our  lines  a  labor  union  in  the  shop  crafts 
known  as  System  Federation  No.  90,  which  is  affiliated  with 
and  is  a  branch  of  the  Railway  Employees  Department  of  the 
American  Federation  of  Labor.  The  officers  of  System 
Federation  No.  90  proposed  to  confer  with  the  company  and 
to  negotiate  rules  in  accordance  with  Decision  No.  119  of  the 
Railroad  Labor  Board.  Our  company  refused  to  negotiate 
with  such  officers,  but,  while  recognizing  no  legal  obligation 
so  to  do,  offered  to  negotiate  with  committees  of  its  employees 
composed  of  men  actually  engaged  in  its  service,  regardless  of 
whether  the  members  of  such  committees  were  or  were  not 
members  of  System  Federation  No.  90. 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  295 

It  may  be  here  stated  that  it  has  been  the  policy  of  our 
company,  since  the  termination  of  Federal  control,  to  re- 
establish with  its  own  employees  a  harmonious  relationship, 
bearing  in  mind  that  honest,  efficient  and  economical  operation 
of  its  lines  can  be  secured  only  by  close  and  unrestricted  co- 
operation by  the  management  and  its  employees.  To  that 
end  it  determined  that  all  classes  of  employees  should  have 
a  voice  in  the  administration  of  matters  affecting  their  welfare 
through  representatives  of  their  own  selection,  provided  that 
such  representatives,  whether  union  or  non-union  men,  should 
be  actual  employees.  The  officers  of  System  Federation -No.  90 
declined  to  cooperate  with  the  carrier  in  the  selection  of  com- 
mittees to  represent  employees  with  whom  the  carrier  might 
negotiate  rules  and  working  conditions.  Thereupon  the  com- 
pany, with  the  cooperation  of  certain  employees  in  the  shop 
crafts,  though  recognizing  no  legal  obligation  so  to  do,  pre- 
pared and  distributed  to  such  employees  a  ballot  upon  which 
each  employee  might  designate  employee- representatives  to 
confer  with  the  company  as  to  rules  and  working  conditions. 

After  the  distribution  of  such  ballots  the  officers  of  System 
Federation  No.  90  distributed  ballots  to  all  such  shop  craft 
employees  and  warned  each  such  employee  not  to  use  the  ballot 
furnished  by  the  carrier,  and  directed  each  such  employee  to 
vote  for  System  Federation  No.  90  as  his  representative  for 
such  conference.  Our  company  recognized  the  result  of  the 
election  which  it  conducted,  and  thereupon  entered  into  con- 
ferences as  to  rules  and  working  conditions  with  the  employee- 
representatives  so  chosen. 

Thereafter  System  Federation  No.  90,  by  Mr.  B.  M.  Jewell, 
President,  Railway  Employees  Department,  American  Feder- 
ation of  Labor,  filed  with  the  Labor  Board  an  application  for 
decision,  complaining  that  the  carrier  had  refused  to  negotiate 
rules  and  working  conditions  with  the  officers  of  System  Feder- 
ation No.  90  and  was  proceeding  to  negotiate  rules  and  work- 
ing conditions  with  committees  selected  in  the  manner  afore- 
said, and  by  reason  of  the  premises  had  violated  Decision  No. 
119,  and  particularly  Paragraph  2  thereof  and  Principles  5  and 
15  attached  to  the  said  decision.  Thereafter  the  Board  ren- 
dered its  Decision  No.  218,  in  which  it  said :  "  Under  the  au- 
thority of  the  Transportation  Act  as  hereinbefore  cited,  the 


296  RAILROADS  AND  BUSINESS  PROSPERITY 

Labor  Board  hereby  declares  that  both  of  said  elections  on  the 
Pennsylvania  System  were  illegal  and  that  rules  negotiated  by 
the  alleged  representatives  selected  by  either  ballot  will  be  void 
and  of  no  effect,  and  orders  that  a  new  election  be  held." 

Thereupon  the  company  made  application  to  the  Board  to 
vacate  and  set  aside  its  said  Decision  No.  218,  expressly  deny- 
ing the  right  and  power  of  the  Board  to  prescribe  principles 
which  must  in  law  govern  the  carrier  and  its  employees  in  the 
making  of  agreements  covering  working  rules  and  conditions. 
Notwithstanding  this,  however,  the  company  asserted  that  it 
had  endeavored  in  negotiations  with  its  employees  to  adopt 
and  observe  such  of  the  said  principles  as  are  fundamentally 
sound  and  correct. 

The  Board  decided  that  it  had  acquired  full  jurisdiction, 
but  it  declared  "  that  question  is  not  of  prime  importance  in 
this  case."     The  Board  also  declared :  "  There  is  no  question 
of  the  closed  or  open  shop  involved  in  this  dispute   and  no 
other  real  matter  of  principle;  the  question  involved  is  merely 
one  of  procedure."     With  these  propositions  the  company  took 
direct  issue  and  represented  to  the  Board  that  if  the  question 
was  merely  one  of  procedure  the  Board  had  no  right  or  power 
to  set  up  its  judgment  or  opinion  against  that  of  the  carrier. 
Dissatisfaction,  whether  real  or  fancied,  by  certain  employees 
with  matters  of  "  mere  procedure  "  should  not  be  tortured  into 
a  "  dispute  "  within  the  purview  of  Sections  301  and  307  of  the 
Transportation  Act.       It  was   claimed  that  no    fear  need  be 
entertained  of  "  interruption  to  the  operation  of  any  carrier  " 
because   of   differences   between   carrier   and   employees   upon 
questions  of  "  mere  procedure."    Disputes  under  the  law,  refer- 
able to  the   Board,  are  those  of  substance  and  real  moment. 
Reduction    of   wages,    real    grievances,    unfair,    unreasonable, 
burdensome  working  rules  and  conditions  are  the  matters  com- 
prehended by  the  Transportation  Act  as  prolific  of  "  disputes  " 
which  might  interrupt  transportation,  to   prevent  which   the 
Labor  Board  was  created.     The  company  denied  the  power  of 
the  Board  to  prescribe  an  election,  or  any  other  method,  by 
which  the  carrier  may  ascertain  who  are  the  authorized  repre- 
sentatives of  its  employees ;  and  it  averred  that  it  could  not 
accept  as  advisory  the  rules  and  conditions  set  forth  in  the 
Board's  decision  in  the  case,  especially  the  form  of  the  ballot 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  297 

and  the  franchise  qualifications  fixed  and  determined  by  the 
Board. 

The  company  represented  that,  as  the  occasion  requires,  it 
will  accord  franchise  rights  only  to  its  employees  in  service, 
or  absent  upon  leave,  and  will  not  concede  voting  qualifications 
to  men  who  have  been  laid  off  or  furloughed  and  who  may  be 
engaged  in  other  occupations  or  who  may  never  return  to  the 
service  of  the  carriers. 

The  company  denied  the  power  of  the  Board  to  compel  a 
conference  or  to  prescribe  with  what  representatives  of  em- 
ployees it  shall  confer,  and  it  declared  that  it  could  not  accede 
to  the  rule  prescribed  for  ascertaining  the  representative 
capacity  of  the  spokesmen  for  unorganized  employees.  The 
Board  was  advised  that  there  were  in  the  service  of  the  carrier 
at  that  time  approximately  176,000  employees  who  were  inter- 
ested in  and  affected  by  rules  covering  working  conditions, 
and  that  117,176,  or  66.5%,  of  said  employees  had  expressed, 
by  vote  or  otherwise  as  a  result  of  conference  a  desire  to 
negotiate  rules  and  working  conditions  through  employee- 
representatives,  and  that  accordingly  contracts  respecting  rules 
and  working  conditions  had  been  entered  into  between  the 
carrier  and  representatives  of  149,918  employees  apportioned 
among  the  several  classes  named  to  the  Board.  These  con- 
tracts were  put  into  full  force  and  effect,  and  by  their  terms 
the  parties  thereto  acquired  mutual  rights  and  assumed  mutual 
obligations. 

We  further  represented  that  since  the  Board  had  handed 
down  its  Decision  No.  218  the  company  had  held  conferences 
with  representatives  of  the  several  crafts  with  whom  contracts 
had  been  made  for  the  purpose  of  ascertaining  whether  or  not, 
in  the  light  of  the  said  decision,  said  employees  were  satisfied 
with  the  manner  of  selecting  representatives  and  with  the  rules 
and  working  conditions  actually  agreed  to;  and  that  as  a  result 
of  said  conferences  the  said  employees,  through  their  repre- 
sentatives, manifested  their  satisfaction  not  only  with  the  man- 
ner of  selecting  representatives,  but  also  with  the  rules  and 
working  conditions  embodied  in  the  said  agreements. 

The  company  thereupon  asked  the  Board  to  vacate  and  set 
aside  its  Decision  No.  218  and  to  find  in  pursuance  of  the 
Transportation   Act:    (a)    that  the   company   had   the   lawful 


298  RAILROADS  AND  BUSINESS  PROSPERITY 

right  to  establish  rules  and  working  conditions  in  the  first 
instance,  either  with  or  without  first  holding  conferences  with 
employees;  and  (b)  that  the  contracts  respecting  rules  and 
working  conditions  theretofore  entered  into  by  the  carrier  and 
its  employees  in  the  shop  crafts  are  now  in  full  force  and 
effect  without  any  further  action  on  the  part  of  the  carrier  and 
its  employees  in  the  said  shop  crafts. 

The  Board  denied  the  company  a  further  hearing  upon  any 
questions  other  than  those  involving  matters  connected  with 
franchise  rights  and  the  election,  the  decision  as  to  which  the 
Board  refused  to  vacate. 

Another  effort  was  made  by  the  company  to  settle  peaceably 
its  controversy  with  the  Board,  and  it  respectfully  submitted 
a  reply  to  the  Board's  last  decision,  setting  forth  that  the  said 
decision  was  not  responsive  to  the  company's  application,  and 
it  expressly  represented  to  the  Board  that  the  company  had  not 
denied  and  was  not  now  denying  the  jurisdiction  of  the  Labor 
Board  to  hear  and  decide  such  disputes  as  fall  within  the 
purview  of  the  Transportation  Act,  but  it  denied  the  right  of 
the  Board  to  invade  the  domain  of  management  and  to  assert 
jurisdiction  over  grievances  of  whatsoever  kind  or  character 
in  connection  with  the  employment,  the  discipline  and  the 
discharge  of  its  employees. 

Section  313  of  the  Transportation  Act  provides  that  the 
Labor  Board,  in  case  it  has  reason  to  believe  that  any  decision 
of  the  Labor  Board  is  violated  by  any  carrier  or  employee, 
may  upon  its  own  motion,  after  due  notice  and  hearing  to  all 
persons  directly  interested  in  such  violation,  determine  whether 
in  its  opinion  such  violation  has  occurred  and  make  public 
its  decision  in  such  manner  as  it  may  determine. 

Upon  our  failure  to  comply  with  its  decision  the  Board  cited 
our  company  to  appear  before  it  in  accordance  with  this  section, 
and  we  appeared  for  the  purpose  of  informing  the  Board  that 
we  could  not  accept  as  a  lawful  decision  the  declaration  of  the 
Board  that  the  election  under  which  the  employee-representa- 
tives were  chosen  was  illegal  and  that  the  rules  and  working 
conditions  agreed  upon  by  such  employee-representatives  and 
the  management  were  void  and  of  no  effect. 

This  position  was  taken  and  maintained  by  the  company 
because  it  was  of  the  opinion  that  the  Board  had  no  jurisdiction 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  299 

over  the  matter  which  was  the  subject  of  the  decision.  Con- 
forming to  the  letter  and  the  spirit  of  the  Transportation  Act, 
the  carrier  pledged  itself  to  the  principle  of  collective  bargain- 
ing with  its  employees  by  and  through  the  medium  of  employee- 
representatives  of  their  own  selection,  and  in  good  faith  and 
with  the  cooperation  of  a  large  majority  of  its  employees  of 
all  classes  entered  upon  a  policy  which  promised  good  and  last- 
ing results  in  promoting  harmony  of  action  and  full  under- 
standing of  conditions  between  employees  and  management. 

A  minority  of  employees,  represented  by  System  Federation 
No.  90,  were  opposed  to  employee  representation  and  claimed 
the  right  to  negotiate  concerning  rules  and  working  conditions 
through  the  shop  crafts'  labor  organization.  This  the  com- 
pany deemed  subversive  of  its  lawful  right  to  deal  with  its 
own  employees  without  the  intervention  of  individuals  or 
organizations  whose  manifest  object  is  the  denial  of  the  funda- 
mental right  of  employer  and  employee  to  deal  in  the  first 
instance  with  one  another  respecting  wages  and  working  con- 
ditions in  which  they  alone  are  directly  interested.  And, 
again,  the  company  emphasized  the  fact  that  in  cases  of  dis- 
pute in  relation  to  wages  and  working  conditions  it  has  ever 
been  willing  to  submit  the  dispute  to  the  Labor  Board  and  to 
abide  by  its  decision  in  full  acquiescence  in  and  acceptance  of 
the  provisions  of  the  Transportation  Act. 

The  company  stated  that  it  had  not  "  violated  "  any  decision 
of  the  Labor  Board  in  the  sense  that  it  had  set  at  nought  and 
refused  to  comply  with  the  lawful  pronouncement  of  the  Board ; 
neither  had  it  "  violated  "  any  provision  of  the  Transportation 
Act  nor  "  defied  "  the  Labor  Board  or  the  Congress  which 
created  it.  On  the  contrary,  the  company  has  conceded  the 
jurisdiction  of  the  Labor  Board  to  hear  and  decide  such  dis- 
putes as  fall  within  the  purview  of  the  Transportation  Act, 
and  it  is  a  willing  party  to  several  submissions  now  pending 
before  the  Board  in  the  matter  of  wages  and  working  rules 
and  conditions. 

The  company  further  stated  that  in  its  opinion  the  Board  in 
its  said  Decision  No.  218  had  without  warrant  of  law  exercised 
the  functions  of  an  administrative  or  regulatory  body,  and 
as  such  had  assumed  to  invade  the  domain  of  management  and 
to  assert  jurisdiction  over  matters  solely  referable  to  the  func- 


300  RAILROADS  AND  BUSINESS  PROSPERITY 

tions  of  railway  management.  The  company  believed  the 
Labor  Board  to  be  under  the  law  creating  it  not  an  administra- 
tive but  a  mediative  body,  and  it  pointed  to  the  fact  that  the 
chairman  of  the  Board  had  referred  to  the  Board  at  one  time 
as  an  "  impartial  mediatory  body." 

We  further  stated  that  we  strongly  deprecated  any  con- 
troversy with  the  Board  with  respect  to  the  powers  or  juris- 
diction conferred  upon  it  by  the  Transportation  Act,  and,  if 
compliance  with  the  decision  had  involved  no  serious  conse- 
quences, the  company  in  order  to  avoid  any  controversy  on 
the  subject  would  have  submitted  to  the  decision,  notwithstand- 
ing its  belief  that  the  Board  had  assumed  a  jurisdiction  not 
conferred  upon  it  by  Congress.  But  the  company,  in  the  con- 
sideration of  the  question  as  to  whether  the  directions  of  the 
decision  should  be  observed,  was  obliged  to  determine  whether 
the  system  of  employee  representation  which  it  had  inaugur- 
atd  was  to  be  impaired  and  its  usefulness  and  value  largely 
destroyed,  or  whether  in  order  to  avoid  non-compliance  with 
the  decision  it  should,  in  considering  and  determining  what 
rules  governing  working  conditions  should  be  established, 
consult  with  an  organization  which,  the  company  believes, 
advocates  (a)  the  closed  shop,  (b)  the  sympathetic  strike,  and 
(c)  limitation  of  output,  and  which  had  been  largely  instru- 
mental in  framing  rules  governing  the  operation  of  shops  dur- 
ing the  period  of  Federal  control.  The  company  asserted  that 
these  rules  had  reduced  the  efficiency  of  shop  labor  on  its  lines 
to  the  extent  of  at  least  thirty-five  per  cent,  and  attention  was 
called  to  the  fact  that  the  late  Judge  Prouty,  when  a  member 
of  the  Railroad  Administration,  after  an  investigation  made 
by  him,  publicly  announced  that  upon  the  Pennsylvania  Lines 
East  labor  upon  that  system  was  inefficient  as  compared  with 
private  operation,  the  percentage  of  inefficiency  in  some  cases 
being  as  much  as  33^%. 

The  company,  therefore,  respectfully  represented  to  the 
Board  that  it  should  not  consider  Decision  No.  218  as  a  lawful 
exercise  of  its  powers  and  that  the  carrier  should  not  be  held 
by  the  Board  as  having  "  violated  "  a  lawful  decision  of  the 
Board ;  and  the  company  reasserted  its  purpose  and  willingness 
to  comply  in  all  respects  with  the  provisions  of  the  Transpor- 
tation Act  and  to  submit  itself  to  the  jurisdiction  of  the  Labor 
Board  in  all  matters  cognizable  thereunder. 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  301 

Notwithstanding  this  appeal,  the  company  was  informed  that 
the  Board  was  preparing  a  decision  to  be  published  to  the  world 
that  the  Pennsylvania  Railroad  Company  had  violated  its  de- 
cision and  the  law  of  the  land.  It  was  the  opinion  of  the  com- 
pany that  the  purpose  and  intent  of  Section  313  is  to  induce 
and  impel  through  the  coercive  force  of  public  opinion  com- 
pliance by  any  carrier  or  person  affected  by  an  order  of  the 
Labor  Board  with  the  terms  and  provisions  of  the  same,  and  the 
company  deemed  it  neither  equitable  nor  just  that  it  should 
be  subjected  to  such  coercive  influence  in  respect  to  any  order 
of  the  Board  which  the  Board  was  without  authority  to  make, 
and  that,  consequently,  the  Board  should  be  restrained  by  an 
order  of  court  from  subjecting  plaintiff  to  the  coercive  process 
prescribed  by  the  said  provision  of  the  Transportation  Act  in 
respect  to  the  order  which  the  Company  had  declined  to  obey 
because  the  subject  matter  thereof  was  not  within  the  jurisdic- 
tion of  the  Board. 

Thereupon,  a  petition  was  filed  in  the  United  States  Court 
and  Judge  Landis  granted  a  temporary  restraining  order  to 
prevent  the  publication  by  the  Board  that  our  company  had 
violated  any  legal  decision  of  the  Board  or  had  failed  to 
comply  with  and  observe  the  provisions  of  Title  III  of  the 
Transportation  Act. 

The  case  finally  came  on  for  hearing  before  Honorable 
George  T.  Page,  United  States  Circuit  Judge,  upon  defend- 
ants' motion  to  dismiss  the  bill  and  a  so-called  answer  which 
denies  none  of  the  averments  contained  in  the  petition.  For 
the  defendants,  it  was  argued  (1)  that  the  Labor  Board  is  an 
administrative  arm  of  the  government  over  which  the  courts 
have  no  jurisdiction;  and  (2)  that  the  Board  had  the  power 
exercised  by  it  under  Decisions  119  and  218.  The  court's  find- 
ing on  both  points  was  adverse  to  the  Labor  Board's  contention. 

The  court  decided  that  "  the  appointment  or  method  of 
election  of  conferees  under  Section  301  was  not  one  of  the  func- 
tions delegated  to  the  Board,  and  therefore  it  had  not  the  right 
to  make  the  regulations  provided  for  in  Decision  No.  218,"  and 
it  expressed  the  "  opinion  that  the  purpose  of  Section  301  was 
to  leave  to  the  carrier  and  its  employees  full  liberty  to  get 
together  in  their  own  way." 

The  constitutionality  of  the  act  was  sustained  by  the  court, 


302  RAILROADS  AND  BUSINESS  PROSPERITY 

and  in  this  connection  I  desire  to  make  it  clear  that  it  was  and 
is  the  declared  policy  of  our  board  of  directors  and  executive 
officers  not  to  question  the  constitutionality  of  the  Labor  Board 
provisions  of  the  Transportation  Act  so  long  as  the  Board  exer- 
cises its  functions  in  accordance  with  the  terms  of  the  act. 
And  in  our  bill  of  complaint,  we  raised  the  constitutional  ques- 
tion only  in  the  event  that  the  court  should  find  that  the  Board 
was  acting  within  its  legal  powers.  If  so,  it  was  our  claim 
that  the  exercise  of  such  power  would  deprive  us  of  certain 
constitutional  rights.  The  court  sustained  our  contention  that 
the  Board  had  not  properly  interpreted  the  act,  and  we  are 
satisfied  with  its  finding  in  all  respects. 

Naturally,  we  are  gratified  by  Judge  Page's  decision,  not 
because  of  any  pride  of  opinion  sustained  but  because  it  may 
be  known  of  all  men  that  our  company,  in  objecting  to  the 
Labor  Board's  decision,  was  actuated  by  an  earnest  and  well 
founded  desire  to  protect  its  legal  rights  and  those  of  its  em- 
ployees from  what  we  deemed  to  be  an  unwarranted  assumption 
of  authority  on  the  part  of  the  Labor  Board. 

As  in  the  past,  so  in  the  future  the  Pennsylvania  Railroad 
System  will  subject  itself  to  the  jurisdiction  of  the  Board  in 
strict  conformity  to  the  terms  of  the  act,  and  it  will  abide  by 
the  Board's  decisions  unless  they  be  of  such  a  character  as  will 
necessitate  or  justify  an  appeal  by  the  company  in  an  orderly 
manner  to  the  courts,  or  to  the  bar  of  public  opinion.  This 
privilege  is  enjoyed  alike  by  all  carriers  and  their  employees. 

I  desire  also  to  say  that  no  feelings  of  hostility,  personal  or 
official,  have  been  engendered  between  the  Labor  Board  and 
our  company,  and  that  a  fine  spirit  of  cooperation  has  been 
displayed  by  the  Board  in  the  taking  of  steps  to  secure  a 
judicial  and  authoritative  determination  of  the  legal  questions 
which  have  been  the  subject  of  argument  and  consideration. 


LABOR  POLICIES  OF  THE  TRANSPORTATION 

ACT  FROM  THE  POINT  OF  VIEW  OF 

RAILROAD  EMPLOYEES 

W.  N.  DOAK 
Vice-President,  Brotherhood  of  Railroad  Trainmen 

SINCE  I  last  had  the  pleasure  of  meeting  with  you,  many 
changes  have  taken  place  in  the  industrial  and  economic 
situation  of  the  country,  and  indeed  it  is  a  pleasure  for 
me  to  be  again  honored  with  an  invitation  to  meet  with  you 
and  discuss  briefly  the  industrial  situation  from  the  viewpoint 
of  one  who  represents  railroad  employees.  However,  in  ap- 
pearing before  you  on  this  occasion  it  is  in  an  individual 
capacity,  and  the  views  presented  will  be  more  personal  than 
those  represented  by  my  organization  or  any  other. 

The  organization  that  I  have  the  honor  of  representing  is 
not  now,  nor  has  it  been,  engaged  in  any  of  the  disputes  or 
the  litigation  mentioned  by  the  preceding  speaker.1  The  rela- 
tions between  the  railroads  and  the  employees  in  transportation 
service  are  very  cordial  in  every  respect  and  there  is  no  question 
at  present  regarding  the  right  of  the  employees'  organization 
to  represent  the  employees  in  our  classes.  Consequently,  what 
I  shall  have  to  say  at  this  time  will  be  predicated  on  the  fact 
that  no  such  controversy  exists  so  far  as  our  group  is  concerned. 
Also  I  would  have  you  bear  in  mind  that  we  consider  the 
employees  engaged  in  conducting  transportation  as  being  some- 
what differently  situated  from  those  engaged  in  other  lines  of 
railroad  work.  And  for  that  reason  we  feel  that  probably  some 
special  consideration  should  be  given  to  the  employees  engaged 
in  this  non-competitive  occupation  as  compared  with  those 
engaged  in  a  competitive  occupation. 

The  public  generally  has  become  interested  in  wages  of  rail- 
road employees  and  in  the  adjustment  of  disputes  arising  be- 
tween the  employer  and  the  employee  in  the  transportation 
industry.     This  has  been  brought  about  largely  by  public  dis- 

1  Mr.  Heiserman,  see  pp.  293-302. 

303 


304  RAILROADS  AND  BUSINESS  PROSPERITY 

cussion  of  these  questions  through  the  press  and  on  the  plat- 
form, and  many  different  views  have  been  expressed  as  to  the 
importance  of  these  problems  and  as  to  their  proper  solution. 
Extreme  positions  have  been  taken  by  those  championing  the 
cause  of  the  employer  as  well  as  by  those  advocating  the  cause 
of  the  employee.  Many  public  utterances  have  been  made  that 
tend  largely  to  exaggeration.  It  is  thought  by  many  that  such 
utterances  have  been  largely  prompted  either  by  bias  or  through 
misinformation.  It  is  therefore  a  commendable  and  a  very 
desirable  position  that  has  been  taken  by  your  Academy  in  the 
discussion  of  these  questions  to  bring  together,  as  far  as  pos- 
sible, the  different  elements,  and  obtain  the  different  views,  in 
order  that  you  may  have  as  nearly  as  possible  the  position  of  all. 

There  are  those  who  hold  that  the  labor  organizations  have 
gone  far  beyond  the  bounds  of  reason  and  propriety  in  their 
demands  for  wage  increases  and  are  unfair  in  their  position 
in  the  adjustment  of  transportation  disputes.  On  the  other 
hand  there  are  those  who  hold  that  the  transportation  com- 
panies have  been  exacting  and  unreasonable  in  their  demands 
upon  the  employees.  There  is  still  another  group  that  holds 
that  both  the  carriers  and  the  employees  are  unreasonable  and 
unfair,  and  a  large  percentage  of  the  public  who  are  not  fully 
informed  of  the  facts  believe  that  both  the  carriers  and  the 
employees  are  extremists  and  have  gone  beyond  the  bounds 
of  reason  and  fair  dealing. 

As  much  as  I  should  like  to  agree  with  these  different  ele- 
ments, I  must  of  necessity  disagree  with  the  large  majority  of 
the  views  that  have  been  advanced  and  hold  to  a  more  reason- 
able and  impartial  view,  one  of  justice  and  fair  dealing  to 
both  the  carriers  and  the  employees.  However,  to  arrive  at 
what  is  right  we  should  insist  upon  having  the  facts,  and  when 
the  facts  are  produced  then  a  correct  judgment  can  be  had. 
The  one  great  trouble  has  been  that  attempts  have  been  made 
to  solve  these  problems  on  the  basis  of  colored  facts  or  half- 
truths  for  so  long  that  a  prejudiced  and  biased  judgment  has 
obtained  in  many  instances.  For  instance,  there  are  those  who 
believe  that  the  wage  level  for  train  and  yard  service  employees 
should  be  based  on  the  pre-war  level,  and  there  are  others  who 
as  persistently  contend  that  wages  should  be  based  on  the  war- 
time basis  or  one  still  higher.     There  are  other  who  hold  that 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  305 

the  cost  of  living  should  be  the  prime  factor  in  determining 
such  questions,  and  that  the  wage  rate  should  be  based  upon 
a  standard  of  living  that  would  afford  only  the  necessaries  of 
life,  or  in  other  words,  provide  enough  food  to  prevent  dis- 
solution of  the  body,  together  with  only  a  meager  supply  of 
clothing.  Others  hold  that  wages  of  railroad  employees  should 
be  based  upon  the  ability  of  the  carriers  to  pay  with  a  trans- 
portation rate  at  the  lowest  possible  level.  Still  there  are 
others  who  hold  that  the  American  public  is  only  interested 
in  having  the  lowest  transportation  rate  possible,  regardless  of 
the  financial  ability  of  the  carriers  or  the  living  conditions  of 
the  employees. 

These  are  all  wrong,  and  in  my  judgment  the  proper  and 
legitimate  position  is  that  transportation  rates  should  be  fair 
and  reasonable  and  afford  a  fair  return  on  capital  legitimately 
invested ;  and  on  the  other  hand  the  wages  of  the  employees 
should  be  just  and  adequate  to  afford  a  proper  American  stand- 
ard of  living,  which  should  not  only  provide  food  and  clothing 
but  allow  for  recreation,  the  education  of  the  children,  and  give 
the  employee  the  opportunity  to  lay  aside  funds  for  the  care  of 
himself  and  of  his  dependents  in  case  of  old  age  or  dis- 
ability. Wage  standards  and  levels  should  be  established  in- 
dependent of  and  separate  from  transportation  rates.  Neither 
should  be  dependent  upon  the  other. 

In  the  discussion  of  the  reestablishment  of  pre-war  levels, 
oftentimes  the  fact  is  not  taken  into  consideration  that  if  the 
war  had  not  occurred  conditions  would  have  compelled  a  re- 
adjustment of  the  wages  of  transportation  employees  upward 
not  later  than  the  early  part  of  1917,  because  the  wage  cycle 
made  such  a  readjustment  imperative.  If  the  European  War 
had  not  come  on  and  the  United  States  had  not  been  drawn 
into  the  World  War  and  things  had  followed  their  usual  course, 
an  adjustment  upward  of  the  wages  of  train  and  yard  service 
employees  would  have  taken  place  about  the  time  the  United 
States  entered  the  war.  But  with  the  advent  of  the  European 
War  in  1914,  which  caused  a  rapid  advance  in  living  costs, 
an  adjustment  should  have  taken  place  about  the  latter  part  of 
1916.  This  was  of  course  accelerated  by  the  entry  of  our  coun- 
try into  the  war  early  in  1917,  but  no  readjustment  was  made 
in  wage  rates  until  nearly  the  middle  of  1918,  and  as  a  matter 


306  RAILROADS  AND  BUSINESS  PROSPERITY 

of  fact  a  complete  and  proper  adjustment  was  never  had  in 
wage  rates  until  long  after  the  close  of  the  war  and  then,  in 
so  far  as  train  and  yard  service  employees  were  concerned,  did 
not  reach  a  proper  level.  No  sooner,  however,  was  the  last 
adjustment  made  than  a  clamor  was  started  to  reduce  wages. 
The  unfairness  and  injustice  of  this  situation  had  an  undesir- 
able effect  on  the  transportation  employees  because  they  had  not 
received  any  advance  at  the  time  the  other  classes  of  labor 
received  substantial  advances,  and  at  no  time  had  the  advance 
in  wages  kept  pace  with  the  advance  in  living  costs. 

The  public  mind  was  unduly  and  improperly  preyed  upon 
by  a  system  of  publicity  and  propaganda  to  such  an  extent  that 
substantial  justice  was  withdrawn  from  railroad  employees  and 
an  undesirable  and  unfair  estimate  of  the  true  situation  arose. 
Naturally,  when  such  agitation  became  rampant  and  the  public 
mind  became  disturbed,  as  is  always  the  case  in  such  instances, 
the  railroad  employees  were  placed  in  a  most  unfair  position, 
and  generally  speaking  the  public  was  ready  to  condemn  them 
without  a  knowledge  of  the  facts.  Of  course,  for  the  time 
being  the  railroad  employees  felt  that  they  were  being  unjustly 
and  unfairly  criticized  and  that  it  was  impossible  for  them  to 
obtain  equal  rights.  They  did  not  feel  that  the  reduction  in 
wages  handed  them  by  the  United  States  Railroad  Labor 
Board  in  1921  was  just  and  fair  under  the  existing  circum- 
stances, but,  rather  than  have  trouble  and  turmoil,  they  finally 
bowed  to  public  sentiment  and  respected  the  decision  of  the 
Board.  Encouraged,  as  it  seemed,  by  success  in  obtaining  one 
reduction,  the  railroads  immediately  sought  further  reductions. 
These  the  employees  bitterly  and  justifiably  resisted. 

This  naturally  had  a  tendency  toward  creating  a  fear  in  the 
minds  of  the  employees  that  the  governmental  agency  was 
being  unduly  influenced  by  the  false  propaganda  being  freely 
circulated  over  the  country.  At  the  same  time  there  arose 
agitation  for  the  repeal  of  state  laws,  laxity  in  enforcement  of 
safety  laws,  and  other  agitation  for  inroads  into  the  conditions 
of  employment  of  the  employees,  many  of  which  had  been  in 
effect  for  a  quarter  of  a  century  or  more,  and  the  whole  agita- 
tion was  based  on  the  false  assumption  that  a  reduction  along 
these  lines  would  result  in  a  corresponding  reduction  in  trans- 
portation rates.     Of  course  such  reductions  in  rates  did  not 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  307 

follow,  therefore  the  agitation  has  fallen  flat  to  a  great  extent, 
and  the  public  is  beginning  to  take  a  more  sober  view  of  the 
situation. 

The  unsoundness  of  the  theory  that  wages  should  be  based 
on  the  ability  of  the  carrier  to  pay  is  just  as  apparent  as  the 
falsity  of  the  theory  that  rates  can  be  fixed  on  a  particular  rail- 
road on  the  basis  of  the  density  of  traffic  handled  on  that  line, 
because  the  financial  condition  and  ability  to  pay  of  the  various 
railroads  is  just  as  diversified  as  the  density  of  traffic  on  the 
particular  lines.  So  the  entire  theory  that  a  rate  structure  can 
be  built  up  on  individual  systems  or  parts  thereof  on  the  basis  of 
density  of  traffic,  and  on  other  systems  or  parts  thereof  on  the 
small  amount  of  traffic  handled,  is  no  more  unreasonable  or  un- 
scientific than  the  theory  that  wages  should  be  fixed  on  the 
different  systems  on  the  financial  condition  or  ability  of  the 
roads  to  pay.  In  both  instances  it  has  long  been  recognized 
by  those  who  have  studied  the  question  that  a  rate  structure 
must  be  built  with  the  object  in  view  of  providing  just  and 
reasonable  rates  in  given  territories  or  in  the  country  as  a 
whole,  and  just  so  with  the  wage  structure.  It  must  be  founded 
on  a  just  and  reasonable  wage,  irrespective  of  the  ability  of 
any  particular  carrier  to  pay  this  rate. 

Unfortunately,  beginning  with  the  passage  of  the  Adamson 
Law  in  1916  by  the  Congress  and  a  decision  of  the  Supreme 
Court  of  the  United  States  which  in  substance  held  that  Con- 
gress had  absolute  authority  over  the  transportation  systems, 
the  railroad  labor  situation  has  been  the  subject  of  entirely  too 
much  agitation  and  discussion.  This  has  resulted  in  extreme 
positions  being  taken  by  the  various  parties  interested  and  has 
been  the  cause  of  entirely  too  much  public  alarm  and  unrest. 

Despite  the  much-heralded  national  peril  of  disputes  on  the 
railroads,  there  is  no  more  real  danger  now,  so  far  as  a  paralysis 
of  transportation  is  concerned,  than  there  was  fifteen  or  twenty 
years  ago.  The  plain  truth  of  the  matter  is,  there  are  certain 
people  who  use  this  question  as  a  pastime  and  in  most  instances 
the  matter  is  exaggerated  to  the  greatest  extent.  Even  if  so, 
there  are  many  worse  things  that  could  happen  than  to  have  a 
railroad  strike  occasionally.  For  instance,  the  practice  of 
disseminating  false,  malicious  and  misleading  statements  is 
worse  in  its  effects  than  any  strike  that  could  possibly  take 


308  RAILROADS  AND  BUSINESS  PROSPERITY 

place.  Ever  since  the  beginning  of  the  railroad  business  in  this 
country  there  have  been  different  methods  employed  for  the 
adjustment  of  disputes  between  the  railroads  and  their  em- 
ployees, and  for  a  brief  review  of  these  different  methods  your 
indulgence  is  asked  for  a  few  moments. 

When  the  business  was  in  its  infancy,  direct  contact  was  had 
between  the  employer  and  the  individual  employee,  but  as  the 
industry  grew  and  expanded  and  more  men  were  employed, 
individual  contact  was  impossible  and  the  employees  were 
represented  in  small  groups  by  local  committees  on  different 
parts  of  the  respective  lines.  This  was  extended  from  time  to 
time  until  general  committees  representing  the  employees  were 
organized  to  deal  with  the  various  operating  officials  of  the 
lines  as  a  whole.  Later,  when  the  railroads  began  to  form 
group  organizations  for  mutual  benefit  and  protection,  their 
example  was  followed  by  group  organizations  of  employees, 
the  latter  generally  being  represented  by  the  General  Chairmen 
of  the  systems  in  such  conference,  until  the  eight-hour  move- 
ment was  started.  It  was  then  ascertained  that  the  railroads 
were  uniting  as  a  whole  in  opposition  to  this  movement,  and 
finally  a  national  conference  committee  of  the  railroads  and 
the  employees  was  agreed  upon  to  handle  this  matter  for  the 
country  as  a  whole.  At  the  time  negotiations  were  in  progress, 
through  a  multiplicity  of  advertising,  propaganda  and  other 
methods,  it  was  pointed  out  that  a  national  calamity  faced  the 
country  and  that  if  the  eight-hour  day  became  effective  the 
railroads  faced  immediate  bankruptcy,  with  the  result  that  the 
National  Administration  and  later  Congress  intervened  and 
passed  what  was  known  as  the  Adamson  Eight- Hour  Law. 
This  brought  the  industrial  situation  on  the  railroads  into  the 
national  limelight.  - 

For  a  number  of  years  there  was  no  Federal  agency  in 
existence  that  dealt  with  disputes  on  the  railroads.  Finally 
the  Mediation  and  Arbitration  Act  came  into  existence.  It 
was  amended  from  time  to  time  and  became  a  real  effective 
agency  in  the  solution  of  these  questions.  In  fact  it  afforded 
a  method  of  accommodation  in  virtually  all  disputes  until  the 
eight-hour  movement  was  inaugurated.  As  a  matter  of  fact, 
there  are  a  great  many  of  us  who  hold  the  view  that  it  would 
not  have  been  a  failure  in  this  case  had  not  undesirable  publicity 
become  rampant  with  regard  to  this  question. 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  309 

Immediately  following  the  passage  of  the  Adamson  Eight- 
Hour  Law,  it  became  apparent  that  there  were  those  who  did 
not  desire  friendly  or  mutual  relations  between  employer  and 
employee  in  connection  with  disputes  on  the  railroads,  but  who 
thought  that  a  governmental  agency  should  be  established. 
Many  hearings  were  held  before  the  different  committees  of 
Congress,  but  no  conclusion  was  arrived  at  up  to  the  time  that 
the  United  States  entered  the  World  War  and  the  railroads 
were  taken  over  by  the  Federal  Government.  Of  course  one 
of  the  first  duties  devolving  upon  the  United  States  Railroad 
Administration  was  the  establishment  of  an  agency  .to  deal 
with  wages  and  working  conditions  on  the  railroads.  There 
was  first  established  the  board  to  investigate  and  recommend 
wage  increases.  This  was  composed  of  four  public  men.  After 
extensive  hearings  they  arrived  at  the  conclusion  that  substan- 
tial increases  were  necessary  for  the  transportation  employees. 
This  was  followed  by  the  creation  of  a  court  of  railroad  wages 
and  working  conditions,  bipartisan  in  character,  consisting  of 
six  members,  three  from  the  railroad  employees  and  three  from 
the  railroad  management.  The  duty  of  this  board  was  to 
investigate  and  recommend  adjustment  in  wages  and  rules,  and 
it  continued  to  function  until  the  railroads  were  returned  to 
their  owners.  In  addition  thereto  there  were  established 
boards  of  adjustment,  bipartisan  in  character,  to  adjust  disputes 
other  than  those  arising  over  wage  questions.  These  boards 
were  likewise  continued  until  they  closed  up  all  cases  arising 
under  Federal  control. 

When  it  became  apparent  that  the  railroads  were  to  be  re- 
turned to  their  owners,  Congress  directed  its  attention  to  the 
passage  of  suitable  laws,  including  laws  dealing  with  the  ad- 
justment of  wage  and  other  disputes  on  the  railroads.  This 
resulted  in  the  establishment  of  what  is  known  as  the  United 
States  Railroad  Labor  Board,  tripartite  in  character,  with 
three  representatives  of  the  public,  three  of  the  railroads  and 
three  of  the  employees.  In  addition  to  this,  the  law  contained 
a  provision  for  boards  of  adjustment,  bipartisan  and  voluntary 
in  character,  to  handle  disputes  other  than  those  arising  from 
wage  questions.  Unfortunately  however,  such  adjustment 
boards  were  not  established  promptly.  The  result  was  a  general 
congestion  of  the  docket  of  the  U.  S.  Railroad  Labor  Board, 


310  RAILROADS  AND  BUSINESS  PROSPERITY 

and  this  brought  about  further  criticism  and  alarm  as  to  the 
value  of  the  tribunal. 

During  the  consideration  of  this  species  of  legislation,  the 
railroad  employees  most  strenuously  opposed  the  enactment  of 
the  tripartite  plan,  but  advocated  the  establishment  of  bipartisan 
boards,  with  appeal  boards  or  a  referee  in  case  of  a  deadlock. 
However,  despite  their  opposition,  the  Transportation  Act  be- 
came effective  and  the  United  States  Railroad  Labor  Board 
was  created  and  has  now  been  in  existence  two  years.  There 
has  not  been  sufficient  time,  in  my  judgment,  to  determine  the 
value  of  the  plan,  and  as  a  matter  of  fact  a  great  deal  of 
criticism,  whether  just  or  unjust,  has  been  made  of  this  plan. 
Personally,  I  have  not  believed  that  a  tripartite  plan  is  as 
desirable  as  a  bipartisan  plan,  and  I  believe  the  future  will 
fully  justify  my  position.  As  a  matter  of  fact,  the  experience 
of  the  past  has  to  a  certain  extent  justified  my  views  with  refer- 
ence to  this  question.  For  example,  the  bipartisan  boards  deal- 
ing with  the  adjustment  of  disputes  on  the  railroads  have  in 
every  instance  reached  a  conclusion  and  with  as  little  criticism 
as  seems  possible,  whereas  the  Railroad  Labor  Board  has  been 
the  subject  of  most  severe  criticism  and  agitation.  My  prin- 
cipal objection  to  a  plan  of  this  kind  has  been  that  no  industrial 
court  yet  known  has  proved  a  success.  This  was  true  of  the 
thorough  trial  of  this  species  of  legislation  made  by  Australia 
and  the  Australasian  countries.  The  so-called  Industrial  Court 
of  Kansas  is  going  through  a  most  severe  test,  and  I  am  of  the 
opinion  that  it  is  less  effective  than  those  systems  where  the 
disputants  have  equal  representation,  and  that  it  must  ulti- 
mately fail. 

Compulsory  arbitration  in  this  country  in  the  strict  sense 
has  not  been  resorted  to  in  the  adjustment  of  disputes  of  this 
character,  but  instances  may  be  cited  which  have  been  tried  in 
foreign  countries  and  proved  a  failure  in  each  instance.  I  per- 
sonally believe  that  such  a  law  could  not  be  passed  in  this 
country  and  be  effective,  because  it  seems  repugnant  to  our 
form  of  government. 

The  most  effective  results  in  this  or  any  other  country,  judged 
by  the  experiences  of  the  various  countries,  have  been  from 
mediation,  conciliation  and  voluntary  arbitration,  and  the  most 
effective  remedy  in  the  form  of  a  law  in  the  United  States  has 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  311 

been  the  Erdman  Act,  later  succeeded  by  the  Newlands  Act, 
which  was  displaced  by  the  Transportation  Act  of  1920. 

Observation  and  investigation  of  labor  disputes  lead  me  to 
believe  that  mediation  is  the  most  effective  and  desirable  plan, 
and  when  it  is  coupled  with  conciliation  and  voluntary  arbitra- 
tion it  is  almost  certain  to  afford  an  accommodation  in  every 
instance. 

Whether  or  not  the  United  States  Railroad  Labor  Board  will 
succeed  and  be  a  satisfactory  and  effective  means  of  settling 
labor  disputes  on  the  American  railroads,  depends  upon  the 
character,  ability  and  fitness  of  its  members  and  its-  freedom 
from  entangling  alliances  and  political  entanglements.  In  the 
selection  and  maintenance  of  this  Board  partisanship  and 
favoritism  must  be  cast  aside,  and  practical,  experienced  and 
impartial  men  placed  thereon.  Any  interference  or  undue  in- 
fluence exercised  by  the  Congress  or  the  executive  will  tend  to 
disrupt  and  destroy  this  agency.  Mutual  respect  by  the  rail- 
roads, the  employees  and  the  public  must  be  given  it  or  it  will 
fail.  Likewise  its  conduct  must  be  such  that  it  will  command 
the  respect  of  each  of  these  parties.  It  cannot,  however,  handle 
all  the  disputes  over  wages,  rules  and  conditions  of  employment 
and  function  with  any  degree  of  satisfaction,  and  if  it  is  con- 
tinued there  must  of  necessity  be  other  and  additional  agencies 
established  and  maintained  auxiliary  thereto. 

Penalties  for  strikes  and  lockouts  in  the  existing  law  are  not 
desirable,  and  in  my  opinion  are  objectionable  to  our  form  of 
government.  Therefore  I  consider  it  wholly  unnecessary  to 
place  such  penalties  in  the  law  and  I  disagree  with  those  who 
advocate  putting  so-called  "  teeth  "  in  the  law. 

This  brings  us  then  to  specific  conclusions  as  to  a  proper 
solution  of  railroad  labor  disputes,  and  I  would  suggest  the 
following : 

1.  The  reestablishment  of  the  Board  of  Mediation  and  Con- 
ciliation, with  the  right  to  bring  about,  if  possible,  voluntary 
arbitration. 

2.  The  establishment  of  bipartisan  boards  of  adjustment,  on 
which  the  railroads  and  the  employees  are  equally  represented. 

3.  The  reestablishment  of  the  rights  of  the  respective  parties 
to  adjust  any  dispute  by  mediation,  conciliation  or  voluntary 
arbitration  if  possible,  before  reference  to  any  board. 


312  RAILROADS  AXD  BUSINESS  PROSPERITY 

4.  The  maintenance,  if  necessary,  of  a  board  to  act  as 
referee,  -which  for  the  time  being,  until  otherwise  changed, 
would  be  the  U.  S.  Railroad  Labor  Board ;  this  Board  to  be 
appealed  to  only  in  case  of  deadlock  by  bipartisan  boards  or 
in  case  of  failure  to  adjust  any  dispute  through  mediation, 
conciliation  or  arbitration. 

5.  The  establishment  of  a  system  or  plan  by  which  exact  facts 
concerning  wages,  grievances  and  conditions  of  employment 
may  be  accurately  obtained  in  a  fair  and  impartial  manner. 
The  prohibition  by  law  or  otherwise  of  the  circulation  of  pro- 
paganda concerning  railroad  disputes  which  has  the  tendency 
of  alarming  or  inflaming  the  public  mind. 


LABOR  POLICIES  OF  THE  TRANSPORTATION 

ACT  FROM  THE  STANDPOINT  OF 

THE  PUBLIC  GROUP 

HENRY  T.  HUNT 
Former  Member  of  the  United  States  Railroad  Board 

A  DECISION  construing  several  sections  of  Title  III 
of  the  Transportation  Act  and  determining  tHe  powers 
of  the  Railroad  Labor  Board  has  very  recently  been 
handed  down  by  the  United  States  District  Court  for  the 
Northern  District  of  Illinois,  Judge  Page,  Circuit  Judge,  writ- 
ing the  opinion.  As  this  decision  is  the  law  until  modified  by 
higher  authority,  it  may  be  illuminating  to  examine  it. 

The  Labor  Board  had,  it  appears,  found  that  the  Pennsyl- 
vania Railroad  had  not  complied  with  one  of  its  decisions  and 
was  about  to  publish  its  finding  to  that  effect.  The  Pennsyl- 
vania then  applied  to  Judge  Landis  for  an  injunction  restrain- 
ing the  Board  from  such  publication,  and  a  temporary  order 
was  issued  which  the  Board  endeavored  to  get  set  aside.  After 
a  delay  of  many  months,  Judge  Page  last  week  rendered  his 
decision  refusing  to  dismiss  the  injunction. 

The  Labor  Board  had  proceeded  against  the  Pennsylvania  as 
authorized  by  Section  313,  which  follows  : 

Section  313.  The  Labor  Board  in  case  it  has  reason  to  believe  that 
any  decision  of  the  Labor  Board  or  of  an  adjustment  board  is  violated 
by  any  carrier  or  employee  may  upon  its  own  motion  after  due  notice 
and  hearing  to  all  persons  directly  interested  in  such  violation  deter- 
mine whether  in  its  opinion  such  violation  has  occurred  and  make 
public  its  decision  in  such  manner  as  it  may  determine. 

The  authority  conferred  by  the  above  section  on  the  Board 

to  publish  its  finding  that  railroads  or  employees  have  violated 

its  decisions  is  the  only  express  sanction  provided  by  the  Act 

toward  making  these  decisions  effective.     Were  it  not  for  the 

procedure  set  out  in  this  section,  a  railroad  or  an  organization 

of  employees  might  issue  false  propaganda  to  the  effect  that  it 

had  obeyed  the  decision  or  that  the  decision  did  not  apply  to  it 

or  that  the  board  had  no  jurisdiction  to  make  such  a  decision, 

313 


314  RAILROADS  AND  BUSINESS  PROSPERITY 

and  so  befuddle  the  public  as  to  the  situation  that  public 
opinion  could  not  function.  Congress  did  not  give  the  Board 
arms  to  enforce  its  decisions,  but  did  give  it  a  voice  whereby 
it  might  charge  a  recalcitrant  with  disobedience  and  convict  it 
before  the  bar  of  fair-minded  men  by  means  of  the  marshaling 
of  unassailable  facts. 

In  this  particular  case  the  injunction  issued  by  the  Court 
has  the  effect  of  preventing  the  board  from  informing  the 
public  as  to  the  facts  in  the  controversy  between  the  Pennsyl- 
vania Railroad  and  its  shop  employees.  Official  information 
as  to  the  facts  relating  to  this  controversy  is  of  very  great 
importance,  at  least  to  the  students  of  politics  in  industry. 
It  would,  therefore,  seem  to  be  worth  while  to  examine  the 
decision  in  detail  and  to  ascertain,  if  possible,  whether  it  rests 
upon  secure  foundations. 

In  order  that  the  decision  may  be  understood,  certain  recent 
railroad  history  must  be  recited. 

In  March,  1920,  a  dispute  was  pending  between  practically 
all  the  railroads  and  all  their  employees  as  to  what  should 
constitute  reasonable  wage  rates  and  reasonable  working  rules. 
Representatives  of  the  parties  had  conferred  but  could  agree 
on  nothing.  On  April  16,  1920,  the  entire  dispute  was 
submitted  by  both  parties  to  the  Railroad  Labor  Board  for 
decision.  The  Board  decided  the  wage  portion  by  Decision 
2  of  July  20,  1920,  but  reserved  the  rules  portion  for  further 
consideration. 

By  its  Decision  119  of  April  14,  1921,  the  Board—"  Called 
upon  the  officers  and  System  Organizations  of  employees  of 
each  carrier  parties  hereto  to  designate  and  authorize  repre- 
sentatives to  confer  and  to  decide  so  much  of  this  dispute  relat- 
ing to  rules  and  working  conditions  as  it  might  be  possible  for 
them  to  decide."  This  Decision  119  was,  then,  a  request  made 
of  the  carriers  and  employees  to  aid  the  Board  to  arrive  at  a 
decision  as  to  what  should  constitute  reasonable  rules  and  work- 
ing conditions  by  agreeing  on  as  many  of  said  rules  as  they 
could. 

A  new  dispute  arose  on  the  Pennsylvania  Railroad  as  to 
the  proper  procedure  to  carry  out  the  Board's  request.  Certain 
organizations  of  its  employees  contended  that  representatives- 
should  be  elected  in  a  certain  manner,  but  the  railroad  com- 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  315 

pany  disagreed  with  this  proposal  and  insisted  on  carrying  on 
the  election  in  quite  a  different  fashion.  The  officers  of  the 
company  and  of  these  organizations  of  employees  conferred 
on  the  subject  but  still  failed  to  agree.  Application  was  then 
made  by  the  chief  executives  of  the  organizations  of  employees 
directly  interested  to  the  Board  for  its  decision.  The  company 
also  appeared  before  the  Board,  put  in  its  evidence  and  argued 
in  support  of  its  position. 

By  its  Decision  No.  218,  the  Board  decided  the  dispute  pre- 
sented by  the  employees'  organization,  which  dispute  had  not 
been  decided  in  conference,  although  conference  had  been  had. 
By  this  decision  the  Board  established  rules  of  procedure  for 
the  election  of  employees'  representatives  on  the  Pennsylvania 
Railroad  in  order  that  the  request  of  the  Board  in  Decision  119 
might  be  carried  out.  No  question  was  raised  by  the  railroad 
at  the  time  as  to  the  satisfaction  of  the  requirements  for  con- 
ference imposed  by  another  section  of  the  act,  Section  301. 

Afterwards  the  employees'  organizations  informed  the  Board 
that  the  Pennsylvania  Railroad  was  not  obeying  its  Decision 
218  and  accordingly  the  Board  took  proceedings  under  Section 
313  to  ascertain  whether  the  Pennsylvania  had  violated  this 
decision.  Apparently  it  determined  that  the  railroad  had  done 
so  and  was  about  to  make  its  finding  public  when  it  was 
enjoined. 

Judge  Page,  in  the  opening  paragraph  of  his  opinion,  thus 
states  the  case : 

This  is  a  bill  by  the  Pennsylvania  Railroad  Company  against  the 
Labor  Board  and  its  members  to  enjoin  them  from  functioning  as  a 
board  generally  and  specifically  from  exercising  the  asserted  right  to 
control  the  selection  of  the  referees  provided  for  in  Section  301  of 
the  Transportation  Act. 

Two  claims  were  urged.  (1)  That  the  Act  is  unconstitutional  if,  and 
in  so  far  as.  it  attempts  to  impose  compulsory  arbitration,  and  (2) 
that  the  Act  gives  the  Board  no  right  under  ex  parte  submission  nor 
under  its  own  motion  to  do  any  act  under  Section  301. 

This  statement  of  the  nature  of  the  proceeding  does  not  aptly 
describe  it.  The  Board  was  not,  as  is  stated,  attempting  to 
exercise  the  asserted  right  to  control  the  election  of  the  conferees 
provided  for  in  Section  301,  but  was  asserting  the  right  to 
publish  a  decision  finding  the  carrier  had  not  obeyed  its 
Decision  218.  This  decision  interpreted  the  "  call  "  of  the 
Board  in  Decision  119.     The  conferees  on  the  dispute  which 


316  RAILROADS  AND  BUSINESS  PROSPERITY 

No.  218  decided  had  duly  conferred  and  had  disagreed.  The 
Board  did  not  attempt  to  control  their  selection.  The  chief 
executive  of  one  of  the  parties  had  applied  to  the  Board  for  a 
decision  of  that  dispute.  In  the  controversy  which  Decision 
No.  218  decided,  there  was  no  question  that  the  representatives 
of  the  employees  in  that  dispute  were  properly  authorized  and 
designated  to  confer  nor  that  they  had  conferred  and  had 
disagreed. 

The  opinion  considers  and  apparently  decides  four  points 
as  follows: 

(1)  The  Labor  Board  is  a  body  corporate  subject  to  the 
jurisdiction  of  the  Federal  Courts  and  may  sue  and  be  sued. 

(2)  The  appointment  or  method  of  selecting  referees  under 
Section  301  was  not  one  of  the  functions  delegated  to  the  Board 
and  therefore  it  had  not  the  right  to  make  the  designation 
provided  for  in  Decision  218  on  pages  8,  9  and  10. 

(3)  As  to  other  matters  than  those  jointly  submitted  to  the 
Board  under  Section  301,  the  decisions  of  the  Board  are  only 
advisory,  but  as  to  jointly  submitted  matters  legally  enforcible. 

(4)  Title  III  of  the  Transportation  Act  is  constitutional  and 
confers  on  the  Labor  Board  the  right  to  prescribe  compulsory 
arbitration  and  to  fix  wages  under  such  compulsory  arbitration. 

The  language  of  the  court  is  not  altogether  distinct  and 
without  ambiguity,  but  it  is  believed  the  above  constitutes  a 
fair  statement  of  the  decision  on  the  points  covered  by  the 
opinion. 

The  first  point  needs  no  particular  discussion. 

It  is  believed  that  the  decision  of  the  court  as  to  the  second 
point  is  erroneous.  Section  301  of  the  Transportation  Act 
reads  as  follows : 

Section  301.  It  shall  be  the  duty  of  all  carriers  and  their  officers, 
employees  and  agents  to  exert  every  reasonable  effort  to  adopt  every 
available  means  to  avoid  any  interruption  to  the  operation  of  any 
carrier  growing  out  of  any  dispute  between  the  carrier  and  the  em- 
ployees or  subordinate  officials  thereof.  All  such  disputes  shall  be 
considered  and,  if  possible,  decided  in  conference  between  representa- 
tives designated  and  authorized  so  to  confer  with  the  carriers  or  the 
employees  or  subordinate  officials  thereof  directly  interested  in  the 
dispute.  If  any  dispute  is  not  decided  in  such  conference,  it  shall  be 
referred  by  the  parties  thereto  to  the  Board  which  under  the  pro- 
visions of  this  title  is  authorized  to  hear  and  decide  such  dispute. 

The  relevant  portions  of  Section  307  should  also  be  cited : 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  317 

Section  307.  (a)  .  .  .  Labor  Board  (1)  upon  the  application  of  the 
Chief  Executive  of  any  carrier  or  organization  of  employees  .  .  . 
whose  members  are  directly  interested  in  the  dispute,  (2)  ...  (3) 
upon  the  Labor  Board's  own  motion  if  it  is  of  the  opinion  that  the 
dispute  is  likely  substantially  to  interrupt  commerce,  shall  receive  for 
hearing  and  as  soon  as  practicable  and  with  due  diligence  decide  any 
dispute  involving  grievances,  rules,  or  working  conditions  which  is 
not  decided  as  provided  in  Section  301.  .  .  .  (b)  The  Labor  Board  (1) 
upon  the  application  of  the  Chief  Executive  of  any  carrier  or  organ- 
ization of  employees  .  .  .  whose  members  are  directly  interested  in 
the  dispute  (2)  ...  or  (3)  upon  the  Labor  Board's  own  motion  if  it 
is  of  the  opinion  that  the  dispute  is  likely  substantially  to  interrupt 
commerce,  shall  receive  for  hearing  and  as  soon  as  practicable  and 
with  due  diligence  decide  all  disputes  with  respect  to  the  wages  or 
salaries  of  employees  ...  of  carriers  not  decided  as  provided  in  Sec- 
tion 301. 

It  has  always  been  the  construction  of  the  Board  and  of 
officers  of  carriers  and  of  organizations  of  employees  that 
Section  301  stated  the  duties  of  such  officers  and  employees  of 
carriers  with  reference  to  railroad  labor  disputes.  They  have 
never  understood  that  Section  301  imposes  any  duty  on  the 
Board. 

It  is  also  the  construction  of  the  Board  and  of  such  officers 
that  Section  307  is  the  section  which  confers  jurisdiction  on  the 
Board  to  decide  disputes  as  to  working  conditions  or  as  to  wages 
and  prescribes  the  manner  in  which  such  disputes  shall  be 
presented  to  the  Board. 

It  has  also  been  the  belief  of  the  Board  that  it  had  power 
to  decide  any  dispute  on  which  conference  had  been  had  or 
attempted  by  either  party,  and  which  was  presented  upon  the 
application  of  the  Chief  Executives  of  carriers  or  of  organi- 
zations of  employees,  if  the  dispute  involved  grievances,  rules, 
or  working  conditions  or  wages  or  salaries  of  employees. 

As  appears  by  Decision  218,  the  Board  believes  that  a  dis- 
pute as  to  whether  representatives  were  duly  designated  and 
authorized  to  confer  was  a  dispute  involving  grievances,  rules 
or  working  conditions  which  it  had  power  to  decide  under 
Section  307.  It  has  been  convinced  that  a  dispute  relating 
to  the  proper  designation  or  authorization  of  representatives 
should  be  interpreted  as  coming  within  the  meaning  of  the 
words  "  grievances,  rules,  or  working  conditions."  It  could 
not  well  decide  whether  the  method  adopted  in  the  dispute  was 
a  reasonable  rule  without  deciding  what  a  reasonable  rule  would 
be.  Section  307  (d)  provides  that  all  the  decisions  of  the 
Board  in  respect  to  working  conditions  shall  establish  stand- 


318  RAILROADS  AND  BUSINESS  PROSPERITY 

ards  of  working  conditions  which  are  just  and  reasonable.  A 
method  of  selecting  representatives  to  confer  is  a"  working 
condition".  Experience  has  shown  that  controversies  as  to 
whether  persons  claiming  to  represent  a  particular  class  do  so 
are  very  frequent  and  of  great  importance  in  railroad  oper- 
ation. The  right  of  members  of  organizations  of  railroad 
employees  to  select  their  representatives  as  they  see  fit  and  to 
select  whom  they  see  fit  is  among  the  most  cherished  rights  of 
railroad  employees.  It  has  been  the  subject  of  many  con- 
troversies. Its  denial  by  railroad  officers  has  been  a  frequent 
cause  of  conflict  and  of  discontent.  The  court's  decision  in  this 
respect  apparently  goes  to  the  length  of  holding  that  the 
Board  has  no  power  to  decide  a  dispute  which  concerns  only  the 
question  whether  particular  persons  claiming  to  represent  a 
class  really  do  so  or  to  decide  what  is  the  correct  and  legal 
method  of  determining  who  are  qualified  representatives.  This 
denial  of  power  goes  to  the  very  essence  of  Title  III.  If  the 
Court's  decision  in  this  respect  is  not  reversed,  it  will  destroy 
the  efficacy  of  that  title  as  means  to  prevent  interruption  of 
railroad  operation  by  labor  disputes. 

It  would  appear  to  be  clear  that  there  can  be  no  dispute 
cognizable  by  the  Board  unless  the  subject  of  dispute  is  adopted 
as  such  by  an  organization  of  employees  or  by  100  unorganized 
employees  who  are  really  organized  for  the  purpose  of  present- 
ing the  dispute.  If  a  carrier  may  decline  to  confer  with  the 
representatives  designated  by  the  organization  according  to 
its  laws  and  the  Board  has  no  power  to  decide  whether  the 
railroad  officers  are  under  a  duty  to  confer  with  the  said  repre- 
sentatives, the  effective  power  remaining  to  the  Board  is  little 
more  than  a  power  to  collate  statistics.  The  court  by  this 
decision,  has,  in  my  judgment,  disemboweled  Title  III.  The 
right  of  organizations  of  employees  to  select  w'hat  representa- 
tives they  see  fit  has  been  long  acquiesced  in  by  practically  all 
the  railroads  of  the  United  States.  The  Pennsylvania  Rail- 
road is  the  only  notable  exception.  In  the  past  this  railroad 
has  generally  claimed  the  right  to  decide  with  what  representa- 
tives it  would  confer. 

The  result  of  this  decision,  in  effect,  is  to  enable  the  officers 
of  carriers  to  decide  with  what  persons  claiming  to  be  repre- 
sentatives of  employees  it  will  confer.     The  Board  according 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  319 

to  the  court  has  no  power  to  correct  their  decision.  The  de- 
cision destroys  the  efficacy  of  Section  301  as  a  mandate  to 
officers  and  employees  of  carriers  to  confer  and  to  decide  their 
disputes  in  conference  if  possible.  Naturally  the  employees 
can  confer  only  by  representatives.  If  the  carrier  may  decide 
finally  who  are  representatives  of  the  employees,  it  is  clear 
that  the  representatives  so  designated  by  the  carrier  may  not 
be  those  whom  the  employees  wish  to  represent  them.  As  the 
representatives  selected  by  the  carriers  to  represent  the  em- 
ployees may  not,  in  fact,  represent  them,  it  is  clear  that  the 
employees  will  not  be  bound  by  the  agreements  entered  into 
by  the  representatives  recognized  only  by  the  railroad  officers. 
There  may  be  conference  and  agreement  between  the  conferees 
but  the  agreement  will  get  nowhere.  Railroad  employees  will 
not  permit  railroad  officers  to  select  their  representatives. 

It  is  respectfully  urged  that  the  court  in  this  respect  is  in 
error.  Railroad  employees  have  a  right  to  organize  and  the 
members  of  the  organizations  have  a  right  to  choose  such  repre- 
sentatives as  they  see  fit  and  it  is  the  duty  of  officers  of  carriers 
to  confer  with  the  representatives  chosen  by  the  members  of 
the  said  organizations.  It  must  be  within  the  power  of  the 
Board  to  decide  whether  the  representatives  claiming  to  repre- 
sent the  members  of  organizations  do  in  fact  represent  them, 
if  the  Board  is  to  function. 

As  stated  above,  the  fourth  matter  decided  by  the  learned 
judge  is  that  Title  III  provides  for  compulsory  arbitration  and 
that  it  is  constitutional.  Yet  it  is  decided  that  prior  to  refer- 
ence to  the  Board  as  arbitrators  of  the  dispute  there  must  be 
conference  between  representatives  of  the  parties.  It  is  further 
decided  that  one  party  may  recognize  whom  it  pleases  as  the 
representatives  of  the  other  party  and  that  the  Board  may  not 
review  this  decision.  Therefore,  the  court  has  decided  that 
railroad  employees  are  required  by  law  to  confer  by  representa- 
tives but  that  the  management  can  select  their  representatives ; 
that  the  representatives  so  selected  and  the  management  may 
jointly  refer  the  dispute  to  the  Labor  Board;  that  the  repre- 
sentatives selected  by  the  management  to  represent  the  men 
may  present  evidence  and  arguments  to  the  Labor  Board ;  and 
that  when  the  Board  has  heard  the  representatives  selected  by 
the  management  to  represent  the  management  and  the  repre- 


320  RAILROADS  AND  BUSINESS  PROSPERITY 

sentatives  selected  by  the  management  to  represent  the  men, 
the  Board  may  decide  the  matter  and  the  employees  of  the 
railroad  concerned  are  bound  by  law  to  obey  the  decision  of 
the  Board. 

Judge  Pages  states  that  the  decision  of  the  Board  on  disputes 
jointly  referred  by  the  parties  is  binding  and  may  be  enforced 
by  court  proceedings. 

The  dispute  must  be  jointly  referred  by  the  parties.  And 
who  are  the  parties?  The  parties  must  be  the  railroad  com- 
pany and  the  organizations  of  employees  conferring  through 
representatives.  Who  is  to  refer  the  dispute?  The  words  of 
Section  301  are  "  it  shall  be  referred  by  the  parties."  The 
parties  to  a  reference  are  not  the  representatives  or  delegates 
conferring  but  the  persons  or  organizations  they  represent. 
Under  Judge  Page's  decision  it  would  appear  that  it  is  the  rep- 
resentatives who  must  jointly  refer  the  dispute.  If  the  dispute 
is  referred  by  the  representatives  of  the  management  selected 
to  act  for  the  management  and  the  "  representatives  "  appointed 
by  the  management  to  act  for  the  men,  what  becomes  of  Section 
307?  That  is  the  only  section  conferring  any  power  on  the 
Board  to  decide  disputes.  It  can  act  only  upon  the  application 
of  the  Chief  Executive  of  any  carrier  or  organization  of  em- 
ployees whose  members  are  directly  interested  in  the  dispute 
unless  it  intervenes  on  its  own  motion  because  the  dispute  is 
likely  to  interrupt  commerce  substantially.  As  the  carrier 
can  in  effect  select  the  representatives  of  the  employees  under 
the  court's  decision,  to  get  the  matter  "arbitrated"  by  the  Board 
it.  must  necessarily  also  select  the  Chief  Executive  of  the  or- 
ganization of  employees  to  refer  the  dispute.  It  would  seem, 
therefore,  that  not  only  has  the  court  in  effect  rendered  organi- 
zations of  employees  impotent  to  select  their  own  representa- 
tives to  confer  under  Section  301  but  it  has  also  in  effect  author- 
ized the  management  to  select  the  Chief  Executive  for  the 
organizations  of  employees.  The  court  has  apparently  author- 
ized the  railroad  companies  to  create  organizations  of  em- 
ployees of  their  own  to  handle  rights  provided  and  duties  im- 
posed by  Title  III. 

The  court  decides,  however,  that  the  Chief  Executive  of  an 
organization  of  employees  may  make  application  to  the  Board 
for  decision  of  a  dispute  and  that  the  Board  must  decide  it. 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  321 

In  this  case,  however,  the  Board's  decision  is  only  advisory  and 
can  not  be  enforced  by  legal  proceedings. 

Probably  the  Board  is  also  without  power  to  look  into  the 
qualifications  of  the  Chief  Executive  claiming  to  be  such.  If 
the  Board  may  not  decide  who  are  qualified  conferees  it  may 
not  decide  who  are  or  are  not  "  Chief  Executives."  Railroad 
employees  must  thus  receive  such  wages  and  work  under  such 
working  conditions  as  the  Board  decides  are  just  and  reason- 
able after  hearing  representatives  of  the  management  only. 

Section  309  provides :  "Any  party  to  any  dispute  to  be  con- 
sidered by  the  Labor  Board  shall  be  entitled  to  a  hearing.either 
in  person  or  by  counsel."  As  apparently  under  the  court's 
decision  the  parties  to  the  dispute  may  consist  entirely  of  repre- 
sentatives satisfactory  only  to  the  management,  it  is  only  repre- 
sentatives of  the  management  who  are  entitled  to  such  hearing. 

The  opinion  finds  that  the  decision  of  the  Board  has  a 
different  effect  according  to  whether  the  dispute  comes  before 
the  Board  by  joint  submission  under  Section  301  or  by  appli- 
cation of  the  Chief  Executive  of  a  party.  If  by  the  first 
method,  the  decision  of  the  Board  is  binding  and  can  be  en- 
forced by  legal  proceedings,  if  by  the  second  method,  the 
decision  is  merely  advisory.  If  the  carrier  goes  to  the  length  of 
selecting  a  "  Chief  Executive  "  as  well  as  representatives  for 
the  men,  it  may  get  a  binding  decision. 

It  is  believed  that  this  is  an  error;  parties  have  only  one 
method  of  getting  a  dispute  before  the  Board  for  decision. 
This  one  method  is  set  out  in  307,  viz.  by  application  of  the 
Chief  Executive  of  a  carrier  or  of  an  organization  of  employees 
directly  interested  or  by  application  of  100  or  more  unorgan- 
ized employees. 

This  provision  was  adopted  by  Congress  in  part  to  avoid 
the  reference  of  trivial  disputes  to  the  Board.  It  was  believed 
that  the  Chief  Executives  of  the  carriers  and  of  organizations 
of  employees  would  refer  only  matters  of  consequence.  Con- 
gress also  understood  that  the  Chief  Executives  of  carriers 
and  of  organizations  of  employees  had  adopted  definite  policies 
with  reference  to  wages  and  working  conditions  and  it  was 
believed  desirable  to  put  them  in  a  position  to  control  reference 
of  disputes. 

The  inference  from  the  court's  decision  is  that  the  parties 


322  RAILROADS  AND  BUSINESS  PROSPERITY 

to  the  dispute  are  the  representatives  conferring.  If  this  is 
the  case,  these  representatives  may  apparently,  under  his  de- 
cision, refer  what  they  wish  without  reference  to  the  Chief 
Executive.  Thus  disputes,  for  example,  between  shop  fore- 
men and  employees  on  trivialities  may  be  referred  to  the  Board 
for  decision.  The  effect  of  this  will  be,  of  course,  to  swamp  the 
Board  with  unimportant  disputes.  The  requirement  imposed 
by  Congress  that  the  Chief  Executive  make  application  im- 
poses on  him  the  duty  of  weeding  out  matters  of  slight 
importance. 

As  the  Board  makes  rules  and  wage  rates  for  almost  two 
million  men  and  its  decisions  have  involved  hundreds  of  mil- 
lions of  dollars,  it  ought  not  to  be  troubled  with  matters  which 
responsible  officers  can  themselves  settle. 

The  judge  finds  that  the  Board's  decision  under  an  appli- 
cation not  jointly  submitted  by  both  parties  to  a  dispute  is 
advisory  only.  Decision  218  was  a  decision  upon  the  appli- 
cation of  one  party,  viz.,  the  labor  organization.  Hence,  under 
the  judge's  construction,  Decision  218  was  advisory  only, 
yet  he  refuses  to  dismiss  an  injunction  against  the  publication 
of  this  advisory  decision.  It  seems  remarkable  that  the  Board 
may  not  even  render  its  advice  without  doing  irreparable  in- 
jury to  the  Pennsylvania  Company. 

Of  course,  it  may  be  that  the  decision  is  intended  to  restrain 
the  Board  from  the  expenditure  of  public  money  to  publish  a 
decision  which  it  had  no  authority  to  make.  This  is  not  stated, 
but  conceivably  it  might  be  rested  upon  that  ground.  The 
argument  would  be  that  the  law  gives  the  Board  the  right  to 
decide  only  disputes  involving  grievances,  rules  and  working 
conditions,  whereas  a  dispute  which  relates  to  a  question 
whether  particular  persons  are*  in  fact  duly  designated  repre- 
sentatives of  the  parties  is  not  a  dispute  involving  grievances, 
rules  and  working  conditions.  Yet  it  would  appear  that 
Congress  must  have  intended  a  dispute  involving  those  sub- 
jects to  be  within  the  powers  of  the  Board  to  decide.  The 
paramount  object  of  Congress  as  is  shown  by  an  examination 
of  the  entire  act  was  to  prevent  interruption  of  operation 
growing  out  of  disputes  between  railroads  and  their  employees. 
Certainly  a  dispute  as  to  who  should  be  the  representatives  of 
employees  is  one  which  might  well  bring  about  interruption  to 


LABOR  POLICIES  OF  THE  TRANSPORTATION  ACT  323 

operation.  When  the  tribunal  created  by  Congress  to  decide 
disputes  tending  to  interrupt  operation  is  prevented  from  de- 
ciding one  of  the  main  subject  matters  of  disputes,  a  subject 
matter  which  experience  has  shown  is  among  the  most  passion- 
ately asserted  and  strongly  maintained  rights  of  workmen,  the 
power  of  that  tribunal  to  function  effectively  is  almost  fatally 
injured. 

It  would  seem  to  be  clear  that  Congress  intended  the  Board 
to  have  jurisdiction  over  all  disputes  tending  to  interrupt  oper- 
ation ;  that  a  dispute  as  to  what  persons  are  properly  recogniz- 
able by  railroad  management  is  one  tending  to  interrupt  oper- 
ations ;  that  such  a  dispute  involves  grievances,  rules  and  work- 
ing conditions ;  that  Decision  No.  218  of  the  Board  was  within 
this  jurisdiction;  that  the  Board  had  power  to  determine 
whether  the  Company  had  violated  its  decision  and  to  publish 
its  decision.  It  is  believed,  therefore,  that  the  court  should 
have  overruled  the  injunction  instead  of  continuing  it. 

If  this  line  of  reasoning  is  valid,  Judge  Page's  decision  can- 
not be  considered  a  correct  determination  of  law.  It  is  earn- 
estly hoped  that  the  Board  will  take  steps  to  secure  a  review 
of  this  decision  by  the  Court  of  Appeals  and  by  the  Supreme 
Court.  If  such  action  is  not  taken  the  discontent  already  exist- 
ing in  railroad  service  will  be  enormously  increased. 


THE  FARMERS  AND  THE  RAILROADS 

HENRY  C.  WALLACE 
Secretary  of  Agriculture 

AGRICULTURE  is  our  greatest  industry ;  transportation 
our  second  greatest.  These  two  industries  are  de- 
pendent upon  one  another,  and  the  national  well- 
being  is  dependent  upon  both.  The  failure  of  either  to  function 
efficiently  results  in  widespread  inconvenience,  financial  loss, 
and  quite  possibly  national  disaster. 

Agriculture  and  railroad  transportation  have  developed 
together,  each  making  the  rapid  extension  of  the  other  possible, 
and  together  they  have  contributed  to  the  rapid  development 
of  the  country.  Perhaps  exploitation  is  a  more  truly  descriptive 
term  of  what  has  happened  through  the  rapid  extension  of 
agriculture  and  transportation  during  the  past  sixty  years. 

Intelligent  consideration  of  the  subject  assigned  to  me  re- 
quires a  brief  historical  review.  As  population  increased  along 
our  eastern  and  southern  coasts,  the  farmers  pushed  up  the 
navigable  streams,  using  them  as  a  means  of  transporting  their 
surplus  to  market.  Until  the  middle  of  the  last  century  the 
occupation  of  the  land  was  proceeding  in  an  orderly  manner, 
farming  being  extended  as  the  need  for  food  increased,  and  in- 
dustry following  close  after  as  the  country  settled  up  and  the 
cost  of  transporting  manufactured  products  made  it  more 
economical  to  carry  the  factory  closer  to  the  farm.  Frontier 
agriculture  and  pioneer  settlements  were  based  upon  the  prin- 
ciple of  self-sufficiency,  and  the  commercial  surplus  was  limited 
to  products  which  were  valuable  in  relation  to  weight  and  bulk 
and  could  be  easily  preserved  and  transported  in  the  pack. 
Each  pioneer  farm  family  itself  produced  most  of  the  things 
necessary  to  its  living.  The  growth  of  the  cities  and  settle- 
ments nearer  the  sea  stimulated  the  desire  for  transportation 
of  farm  products  from  farther  back  in  the  country  and  led  to 
the  building  of  canals  reaching  rich  agricultural  areas.  The 
building  of  the  Erie  Canal,   for  example,  made  possible  the 

maintenance  of  the  growing  population  of  New  York  City,  since 
324 


THE  FARMERS  AND  THE  RAILROADS  325 

it  lapped  the  fertile  wheat-producing  areas  and  assured  an 
abundant  supply  of  bread  at  a  reasonably  low  price. 

The  development  of  rail  transportation,  the  invention  of 
labor-saving  farm  implements  and  the  liberality  of  the  Gov- 
ernment in  the  disposition  of  its  lands  resulted  in  the  most 
remarkable  period  of  agricultural  expansion  and  industrial  and 
urban  growth  the  world  has  ever  seen.  In  1860  there  were 
about  30,000  miles  of  railroads  in  operation,  mostly  east  of 
the  Mississippi.  By  1900  there  were  almost  200,000  miles. 
In  1860  there  were  about  407,000,000  acres  of  land  in  farms, 
much  of  which  was  not  being  intensively  cultivated.  By  1900 
the  land  in  farms  had  more  than  doubled,  and  was  being  much 
more  thoroughly  cultivated.  Coincident  with  this  develop- 
ment of  transportation  and  expansion  of  agriculture  came  the 
improvement  in  ocean  shipping,  bringing  the  markets  of 
Europe  closer  by  at  least  one-half  because  of  the  reduction  in 
shipping  rates.  Within  the  lifetime  of  one  generation,  there- 
fore, we  opened  up  a  vast  agricultural  empire  and  our  country 
became  the  greatest  producer  of  agricultural  surplus  in  the 
world.  A  fertile  soil  suited  to  extensive  farming  operations, 
the  rapid  improvement  in  labor-saving  implements,  cheap 
transportation  both  by  rail  and  water,  and  ambitious,  energetic, 
hard-working  farmers,  eager  to  possess  the  land,  combined  to 
produce  a  flood  of  cheap  grains  and  live-stock  which  brought 
disaster  to  the  farmers  of  the  east  and  even  compelled  import- 
ant readjustments  by  farmers  in  the  older  settled  countries  of 
Europe. 

Had  our  railroads  been  extended  into  the  west  only  as  the 
growth  of  our  population  made  necessary  an  increased  supply 
of  food,  it  is  reasonable  to  suppose  that  freight  charges  would 
have  been  fixed  at  figures  which  would  have  made  sure  of 
operating  costs  and  a  fair  return  upon  the  capital  invested. 
Under  such  conditions  it  is  reasonable  to  suppose  further  that 
manufacturing  and  industry,  and  with  them  a  consuming  popu- 
lation, would  have  moved  westward  following  the  extension  of 
agriculture.  But  a  different  policy  was  followed.  Our  people 
were  possessed  of  a  fever  to  occupy  the  country.  Land  grants 
and  subsidies  of  all  sorts  were  offered  for  railroad-building, 
and  as  these  new  roads  were  necessarily  dependent  for  their 
principal  revenue  on  agricultural  tonnage  and  tonnage  on  goods 


326  RAILROADS  AND  BUSINESS  PROSPERITY 

the  farmers  would  buy,  freight  rates  were  based  on  what  the 
traffic  would  bear,  rather  than  on  what  might  be  shown  to  be  a 
fair  charge  for  the  service  rendered  based  on  operating  costs 
and  interest  on  the  actual  investment.  Thus  rates  on  grain 
were  fixed  at  a  point  which  would  not  discourage  the  growing 
of  grain,  while  rates  on  live-stock  were  so  adjusted  as  to  come 
just  within  the  point  at  which  the  stockman  could  better  afford 
to  ship  than  to  make  his  stock  walk  to  market.  In  those  days 
of  western  development  it  was  the  policy  of  railroad  managers 
to  foster  agriculture  along  their  various  lines,  for  the  very 
good  reason  that  they  depended  upon  agriculture  for  a  living. 
Low  rates  were  made  for  long  hauls  of  farm  products.  This 
gave  cheap  food  to  eastern  industrial  centers  and  gave  the  rail- 
roads long  hauls  back  on  manufactured  products.  The  traffic 
departments  of  the  western  roads  courted  the  farmer  and  stock- 
man. Their  products  were  moved  promptly.  In  the  case  of 
live-stock,  the  shipping  time  from  western  points  to  the  central 
markets  was  shorter  thirty  years  ago  than  it  is  today. 

As  the  country  settled  up  and  towns  and  villages  in  the  west 
grew  into  small  cities,  the  policy  of  low  rates  for  long  hauls 
both  of  agricultural  and  manufactured  products  was  continued. 
Efforts  to  establish  industrial  enterprises  in  great  surplus- 
producing  states  west  of  the  Mississippi  were  systematically  dis- 
couraged, even  to  the  extent  of  making  grossly  discriminatory 
rates  against  such  enterprises.  Those  were  the  days  before 
government  supervision  or  control  of  rates.  The  railroad  man- 
ager was  a  law  unto  himself,  made  rates  according  to  his  own 
sweet  will,  and  made  and  unmade  individuals  and  communities 
in  his  own  interest  and  the  interest  of  his  own  road.  He  con- 
ceived it  to  be  to  the  advantage  of  the  railroad  to  keep  the 
farm  and  the  factory  as  far  apart-as  possible  in  order  that  the 
railroad  might  haul  their  respective  products  the  longest  pos- 
sible distances.  It  was  this  high-handed  policy  which  caused 
the  enactment  of  the  famous  granger  laws  and  later  the  inter- 
state commerce  law  and  the  creation  of  the  Interstate  Commerce 
Commission  with  government  control  of  rates  and  practices. 

In  the  foregoing  I  have  tried  to  make  clear  that  western 
agriculture  has  been  developed  on  freight  rates  made  with  a 
view  to  encouraging  the  movement  of  farm  products  long  dis- 
tances to  central  processing  and  consuming  markets,  such  rates 


THE  FARMERS  AND  THE  RAILROADS  327 

of  course  being  adjusted  roughly  to  the  bulk  and  value  of  the 
crop  to  be  moved.  It  necessarily  follows  that  the  character  of 
the  farming  and  the  value  of  the  land  and  improvements  were 
determined  by  this  policy,  and  that  any  marked  change  in  the 
policy,  even  if  adhered  to  for  but  a  relatively  short  time,  is 
bound  to  make  necessary  profound  changes  in  both  agriculture 
and  industry. 

During  the  years  from  1890  to  1917  the  Interstate  Commerce 
Commission  was  kept  busy  hearing  appeals  from  shippers  for 
rate  changes  and  adjustments,  and  during  the  latter  part  of  that 
period  the  railroads  made  several  appeals  to  the  commission  to 
permit  substantial  advances  in  rates.  The  requests  from  ship- 
pers were  mostly  for  a  more  equitable  adjustment  of  rates  as 
between  communities  or  regions  and  as  between  commodities, 
in  the  effort  to  remove  discriminatory  rates  which  were  the  in- 
evitable result  of  the  purely  arbitrary  and  unscientific  methods 
of  rate-making  which  had  been  followed  during  the  period  of 
exploitation.  It  was  during  this  period  that  we  began  to  form 
a  conception  of  just  railroad  rates,  based  not  upon  what  the 
traffic  would  bear  but  upon  a  fair  return  to  capital  actually 
invested,  or  the  fair  value  of  the  property,  plus  a  return  suffi- 
cient to  cover  operating  charges  and  adequate  upkeep  under 
competent  management.  As  a  necessary  preliminary  to  the 
determination  of  such  just  rates  Congress  provided  for  a  com- 
plete physical  valuation  of  all  the  railroads  of  the  country, 
and  this  stupendous  undertaking  was  begun  during  the  period 
indicated. 

When  the  railroads  were  taken  over  by  the  government  it 
was  with  the  understanding  that  they  should  be  assured  a  net 
return  equal  to  the  average  net  return  of  the  three  years  just 
preceding,  which  happened  to  be  the  most  prosperous  three- 
year  period  the  roads  had  ever  experienced.  No  measures 
were  taken  to  control  wages  or  the  other  factors  which  entered 
into  the  cost  of  operation  and  maintenance.  It  was  simply 
another  way  of  applying  the  utterly  vicious  cost-plus  policy 
and  added  much  to  the  burden  of  debt  under  which  our  people 
will  be  laboring  for  a  generation  yet  to  come.  During  this 
period  of  government  operation  prices  of  most  commodities  rose 
to  the  highest  point  ever  known.  Intelligent  railroad  oper- 
ation,   therefore,    would    have    justified    increases    in    freight 


328  RAILROADS  AND  BUSINESS  PROSPERITY 

charges  fairly  comparable  with  the  increases  in  the  values  of 
the  commodities,  with  a  view  to  holding  down  the  amount 
needed  to  make  good  the  government  guarantee.  Some  in- 
creases in  rates  were  made,  but  not  enough  to  meet  the  increase 
in  expenses.  Costs  of  operation  were  permitted  to  increase 
almost  without  hindrance,  and  in  the  case  of  wages,  the  largest 
cost  item,  with  government  acquiescence  and  even  encourage- 
ment. Thus  when  the  time  came  to  hand  the  roads  back  to 
their  owners  they  were  in  such  condition  that  they  seemed  to 
require  very  large  increases  in  freight  rates  if  they  were  to  be 
kept  out  of  the  hands  of  receivers.  Just  at  the  time,  therefore, 
when  we  were  entering  the  period  of  severe  liquidation  and 
prices  of  commodities  and  especially  of  agricultural  products 
were  falling  with  great  rapidity,  burdensome  rate  increases 
were  put  in  force. 

The  blighting  effect  upon  agriculture  can  hardly  be  compre- 
hended. I  would  not  be  understood  as  suggesting  that  the 
increases  in  freight  rates  were  wholly  responsible  for  the  un- 
precedented depression  through  which  our  agriculture  has  been 
passing  and  which  for  a  time  threatened  a  financial  disaster 
of  nation-wide  scope,  but  these  higher  rates  contributed  ma- 
terially to  this  depression  and  if  continued  will  require  changes 
in  agriculture  and  industry  of  national  and  international  im- 
portance. Transportation  is  an  essential  part  of  the  process 
of  production.  Transportation  costs  are  a  part  of  production 
costs.  Any  material  advance  in  the  cost  of  production  with- 
out a  corresponding  advance  in  the  price  received  for  the  pro- 
duct involves  important  readjustments.  During  the  past  year 
the  farmer  has  been  compelled  to  accept  for  his  products, 
whether  grain,  live-stock,  cotton,  wool,  or  fruits  and  vegetables, 
prices  which  are  on  the  average  no  greater  than  those  which 
prevailed  during  the  pre-war  period,  meaning  by  the  latter  the 
five-year  period  1910-14  inclusive.  For  a  time  the  prices  of 
some  of  the  coarse  grains  were  as  much  as  forty  per  cent  below 
the  pre-war  average,  and  the  prices  offered  the  farmers  in 
some  of  the  vegetable-growing  regions  were  so  low  that  they 
did  not  cover  the  cost  of  harvesting  and  preparing  for  ship- 
ment. During  the  same  period  freight  rates  on  agricultural 
products  have  been  on  an  average  about  eighty  per  cent  above 
the  rates  which  prevailed  before  the  war.       An  illuminating 


THE  FARMERS  AND  THE  RAILROADS  329 

illustration  of  just  how  the  farmer  is  affected  by  this  condition 
is  furnished  by  the  investigations  of  the  Congressional  Com- 
mission of  Agricultural  Inquiry.  Four  standard  implements 
needed  on  the  western  grain  and  stock  farm  are  a  gang  plow,  a 
wagon,  a  corn-harvester  and  a  grain-binder.  On  August  1, 
1913,  the  cost  of  these  implements  at  certain  points  in  Kansas 
and  Nebraska  was  $490.50,  which  was  equivalent  to  the  farm 
price  of  928  bushels  of  corn.  The  freight  charge  to  Chicago 
on  the  number  of  bushels  of  corn  required  to  purchase  these 
implements  at  that  time  was  $122.16.  On  August  15,  1920, 
the  cost  of  these  implements  was  $944.  This  charge  was-  cov- 
ered by  the  price  received  for  706  bushels  of  corn,  but  the 
freight  charge  on  the  corn  was  $179.30.  On  October  15  the 
cost  of  the  implements  had  been  reduced  to  $751,  but  it  required 
the  value  of  no  less  than  4,191  bushels  of  corn  to  purchase  them 
and  the  freight  on  the  corn  was  $1,051.41.  Similar  illustrations 
in  unlimited  number  can  be  furnished  to  show  the  blighting 
effect  upon  agriculture  of  advances  in  freight  rates  without 
regard  to  the  value  of  the  products  to  be  moved. 

Perhaps  a  more  understandable  way  to  show  the  effect  upon 
agriculture  of  a  continuance  of  the  present  freight  rates  is  by 
noting  the  additional  charge  per  crop-acre  which  they  impose. 
Under  the  old  rates  a  great  fruit  industry  was  built  up  in 
California.  It  is  estimated  that  the  freight  charge  paid  by 
that  State  in  1920  was  about  $64,000,000.  The  increase  in 
freight  rates  during  the  past  four  years  imposes  an  additional 
charge  per  acre  on  lemons  of  $187.67,  which  capitalized  at 
7  per  cent  would  amount  to  $2,681 ;  on  oranges  an  additional 
acre  tax  of  $192.38,  which  capitalized  would  amount  to 
$2,748.28;  on  apples  $160.87,  which  capitalized  would  amount 
to  $2,298.14.  Approximately  the  same  burden  is  imposed  upon 
the  fruit  industry  of  the  entire  northwest  and  the  truck  industry 
of  the  southwest,  the  source  of  a  large  supply  of  vegetables 
of  all  kinds. 

In  the  case  of  the  less  valuable  crops,  such,  for  example,  as 
corn,  wheat,  potatoes  and  cotton,  the  increased  tax  per  acre 
imposed  by  the  present  freight  rates  does  not  seem  to  be  so 
great  when  presented  in  figures,  but  is  in  fact  relatively  as 
great.  For  example,  the  increased  rate  tax  per  acre  on  corn, 
wheat  and  oats,  and  cotton  is  greater  than  was  the  net  return 


330  RAILROADS  AND  BUSINESS  PROSPERITY 

per  acre  to  the  farmer  during  the  pre-war  period.  In  the  case 
of  potatoes  the  increased  rate  tax  per  acre  in  Maine  amounts 
to  $31.80,  and  in  Michigan  and  Louisiana,  both  great  potato- 
producing  regions,  the  increased  rate  tax  per  acre  is  above  $15, 
which,  because  of  the  lower  yield,  is  relatively  as  great  as  the 
increase  in  Maine. 

When  it  is  remembered  that  prior  to  the  war  agricultural 
production  yielded  to  the  average  farmer  nothing  more  than  a 
fair  living,  and,  indeed,  less  than  this  had  the  farmer  demanded 
a  fair  interest  charge  on  his  money  invested  in  land  and  farm- 
ing equipment,  the  impossibility  of  maintaining  production 
under  the  imposition  of  a  rate  tax  as  great  as  has  been  indi- 
cated at  once  becomes  apparent.  Either  freight  rates  on 
agricultural  products  and  on  the  principal  commodities  the 
farmers  need  to  buy  must  come  down  quickly  to  about  pre-war 
levels,  or  prices  of  agricultural  products  must  increase  suffi- 
ciently to  equal  the  increasing  freight  rates,  or  there  will  be 
profound  readjustments  in  agricultural  production,  and  these 
will  involve  readjustments  in  industry  as  well. 

Cherishing  the  hope  that  present  high  freight  rates  are  tem- 
porary, the  farmer  is  struggling  to  continue  his  farming  oper- 
ations without  material  change,  and  in  the  meantime  casting 
about  for  ways  by  which  he  may  overcome  the  handicap  im- 
posed upon  him.  The  fruit-  and  truck-growers  of  the  far  west 
and  southwest,  for  example,  are  turning  to  water  transporta- 
tion, and  with  the  better  adaptation  of  vessels  to  their  needs 
may  find  in  his  way  some  measure  of  relief  from  the  high 
freights.  The  wheat-growers  of  the  west  also  are  using  the 
shorter  haul  to  water  for  export  grains.  To  illustrate  what 
is  happening  in  this  respect,  fifty-three  per  cent  of  the  wheat 
exported  from  this  country  in  1913  went  out  through  the 
Atlantic  and  Canadian  ports.  In  1921,  only  twenty-four  per 
cent  passed  through  the  eastern  ports.  In  1913,  the  Gulf  ports 
handled  thirty-one  per  cent  of  our  export  wheat,  and  in  1921 
slightly  more  than  fifty-nine  per  cent.  Last  year  the  east-and- 
west  rail  lines,  which  formerly  handled  the  bulk  of  our  grain, 
were  running  small  trains  with  light  loads,  while  the  north- 
and-south  lines  in  the  surplus-producing  country,  which  had 
formerly  handled  less  than  one-third  of  our  export  grain,  were 
hauling  long  trains,  heavily  loaded,   and  our  southern  ports 


THE  FARMERS  AND  THE  RAILROADS  331 

were  congested  with  cars  of  grain  waiting  for  ships  that  they 
might  be  unloaded. 

If  the  American  farmer  is  to  compete  successfully  with  the 
Argentine  or  the  Australasian  farmer  in  the  markets  of  Europe, 
he  must  be  able  to  lay  his  products  down  in  Europe  at  a  cost 
approximately  the  same  as  his  competitors.  The  two  principal 
competitive  factors  entering  into  the  cost  of  marketing  agri- 
cultural products  in  Europe  are  the  cost  of  production  and 
transportation.  I  shall  not  attempt  to  go  into  the  question  of 
cost  of  production,  but  shall  confine  myself  to  a  comparison 
of  the  cost  of  transportation  from  the  wheat-producing  centers 
of  the  United  States  and  Argentina  to  the  United  Kingdom. 
It  may  be  well  at  the  outset  to  point  out  that  while  the  cost  of 
ocean  transportation  is  an  important  factor  in  the  cost  of 
marketing  agricultural  products  in  foreign  countries,  it  is  by  no 
means  as  important  a  factor  as  rail  transportation  to  the  sea- 
board, particularly  in  the  United  States,  where  our  producing 
centers  are  located  much  farther  from  the  seaboard  than  are  the 
producing  centers  of  Argentina,  Australia,  and  other  countries 
that  compete  with  the  United  States.  In  Argentina,  for  ex- 
ample, the  average  rail  haul  from  the  wheat-producing  regions 
to  the  seaboard  is  approximately  435  kilometers,  or  261  miles. 
The  cost  of  carrying  1,000  kilograms  (2204.6  pounds)  of  wheat 
a  distance  of  500  kilometers  (310.6  miles)  is  $15.44  Argentine 
paper,  or  $0.15  per  bushel  in  United  States  money  on  the  basis 
of  the  prevailing  rate  of  exchange.  With  an  ocean  freight  rate 
from  Buenos  Aires  to  Liverpool  of  $5.00  per  ton,  this  would 
make  a  rate  of  $0,134  per  bushel,  or  a  combined  rail-and-ocean 
freight  rate  from  the  wheat-producing  centers  of  Argentina  to 
the  United  Kingdom  of  $0,284. 

In  the  United  States  the  export  freight  rate  on  wheat  from 
Hutchinson,  Kansas,  to  Galveston,  Texas,  through  which  a 
large  part  of  our  wheat  is  exported,  is  $0.44^  per  100  pounds, 
or  at  the  rate  of  $0,267  per  bushel.  The  ocean  freight  rate 
from  Galveston  to  the  United  Kingdom  is  $0.21  per  100  pounds, 
or  at  the  rate  of  $0,126  per  bushel.  This  makes  a  combined 
rail-and-ocean  freight  rate  from  Hutchinson,  Kansas,  to  the 
United  Kingdom  of  $0,393  per  bushel,  as  compared  with  a 
total  rail-and-ocean  freight  rate  from  the  wheat-producing 
centers  of  Argentina  to  the  United   Kingdom  of  $0,284  per 


332  RAILROADS  AND  BUSINESS  PROSPERITY 

bushel.  The  wheat  producer  in  Argentina  thus  has  an  apparent 
advantage  of  approximately  $0.11  per  bushel  in  the  cost  of 
transportation  alone. 

In  the  case  of  crops  for  domestic  consumption  grown  in  the 
great  surplus-producing  states  east  of  the  Rocky  Mountains, 
water  transportation  is  not  available.  The  farmers  in  these 
states  must  use  railroads  to  ship  their  surplus  to  market  and 
the  continuation  of  the  present  high  rates  must  inevitably  re- 
duce the  tonnage  of  coarse  grains  and  hay  shipped  to  the  east. 
We  hear  some  criticism  of  the  agricultural  schedules  of  the 
tariff  bill  now  under  consideration  by  Congress.  In  point  of 
fact,  the  duties  proposed  to  be  levied  upon  the  principal  agri- 
cultural products  are  hardly  sufficient  to  equalize  the  additional 
freight  tax  which  already  has  been  imposed  upon  the  farmers 
of  the  surplus-producing  states.  The  increase  in  railroad 
rates  during  the  past  five  years  has  been  in  effect  a  differential 
against  our  own  farmers  in  favor  of  the  farmers  of  foreign 
nations  with  whom  they  must  compete. 

A  few  examples  are  given  below  in  order  to  illustrate  con- 
cretely the  effect  that  high  freight  rates,  if  continued,  are  cer- 
tain to  have,  not  only  on  farming  but  on  the  railroads  them- 
selves. 

In  the  case  of  a  cheap  bulky  commodity  like  potatoes  high 
transportation  costs  will  have  an  important  effect  on  the  dis- 
tribution of  acreage.  At  present  the  commercial  production  of 
this  crop  is  more  or  less  concentrated  in  the  northern  border 
states,  the  central  states  obtaining  much  of  their  supply  from 
those  to  the  north  of  them.  But  when  the  freight  rate  on 
potatoes  from  Bangor,  Maine,  to  New  York  City  increases  from 
25c  a  hundred  pounds  in  1913  to  52>4c  in  1921,  a  differential 
is  established  in  favor  of  the  growers  in  New  York,  New  Jersey, 
Pennsylvania  and  Connecticut  that  will  undoubtedly  increase 
the  acreage  in  those  states  and  make  necessary  a  reduction  of 
acreage  in  the  State  of  Maine.  This  will  deprive  the  railroads 
of  a  large  and  remunerative  traffic.  These  rates  have  the 
effect  of  decreasing  the  profit  on  potatoes  in  Maine  by  25c  per 
hundred  pounds,  which  makes  it  possible  for  other  regions 
nearer  the  market  to  compete.  Since  1913  there  has  been  an 
increase  in  rates  on  Michigan  potatoes  to  New  York  of  29c  or 
just  100%.     A  continuation  of  this  rate  will  have  the  effect  of 


THE  FARMERS  AND  THE  RAILROADS  333 

decreasing  potato  acreage  in  the  west  and  of  increasing  it 
in  the  east,  thus  cutting  off  another  source  of  traffic. 

The  effect  on  the  hay  trade  is  similar.  This  crop  can  be 
grown  anywhere  that  farming  is  possible.  Previous  to  the 
war  the  eastern  states  obtained  a  large  part  of  their  hay  from 
the  Middle  West.  Already  rail  shipments  of  hay  eastward 
have  been  curtailed. 

The  cotton  belt  has  hitherto  imported  most  of  the  hay  it 
requires.  The  recent  increase  in  freights  has  so  enhanced  the 
price  of  hay  in  the  south  that  cotton-growers,  if  this  high  price 
continues,  are  resolving  to  produce  their  own  supplies  of  this 
necessary  commodity.  This  will  deprive  many  roads  of  a 
large  and  important  traffic. 

The  shipment  of  fruits  and  vegetables  from  the  south  and 
from  California  to  eastern  and  northern  cities  is  an  important 
part  of  the  traffic  of  many  lines  of  transportation.  Even  un- 
der pre-war  conditions  large  quantities  of  vegetables  were 
produced  under  glass  near  these  cities  for  the  winter  trade,  in 
competition  with  California  and  the  south.  The  present  rates 
for  transportation  will  enable  more  men  to  succeed  in  growing 
vegetables  under  glass  and  this  will  reduce  the  tonnage  of  such 
commodities  shipped  from  California  and  the  south.  This 
tendency  is  in  fact  already  noticeable. 

A  pound  of  pork  represents  about  ten  pounds  of  corn,  and 
a  pound  of  butter  much  more.  Every  increase  in  transpor- 
tation rates  tends  to  induce  corn-growers  to  condense  their 
products  into  meat  and  butter,  thus  reducing  the  tonnage  of 
farm  products  delivered  to  the  carriers. 

The  largest  yields  per  acre  and  the  greatest  weight  per  bushel 
of  oats  are  obtained  in  our  western  mountain  states.  Yet  these 
states  have  never  grown  oats  except  as  a  supply  crop.  It  is  so 
cheap  a  product  that  it  will  not  bear  the  cost  of  transportation 
to  distant  markets.  The  commercial  production  of  oats  has 
therefore  always  been  concentrated  about  the  great  market 
centers.  Every  increase  in  cost  of  transportation  tends  to 
emphasize  this  concentration,  thus  reducing  tonnage. 

Wheat,  because  of  its  higher  value  per  unit  of  weight,  has 
hitherto  been  widely  grown  in  the  western  mountain  states. 
This  is  the  only  crop  generally  available  to  farmers  in  that 
section  that  is  sufficiently  high-priced  to  bear  the  necessarily 


334  RAILROADS  AND  BUSINESS  PROSPERITY 

heavy  transportation  costs.  The  enormous  increase  in  these 
costs  in  recent  years  may  have  the  effect  of  materially  reducing 
the  acreage  of  wheat  in  these  states.  The  land  thus  vacated 
will  go  to  forage  for  dairy  cows  because  butter  is  sufficiently 
concentrated  to  stand  the  cost  of  getting  it  to  eastern  and  even 
to  European  markets.  In  so  far  as  this  change  takes  place,  and 
it  is  in  fact  actually  taking  place,  the  railroads  will  lose  the 
difference  between  the  freight  on  the  large  volume  of  grain 
now  shipped  and  the  few  pounds  of  butter  than  can  be  made 
from  the  land  vacated  by  wheat. 

Fortunately  it  is  not  necessary  for  you  to  accept  merely  my 
opinion  as  to  the  effect  of  high  transportation  costs  on  agricul- 
ture. The  accompanying  diagram  shows  the  difference  in  the 
farm  prices  of  corn,  wheat  and  oats,  in  the  New  England  States 
on  the  one  hand,  and  the  West  North  Central  States  on  the 
other,  by  five-year  periods  from  1871  to  1915,  and  for  1921. 
It  will  be  observed  that  the  differences  in  prices  east  and  west 
gradually  decreased  until  1915.  Since  that  time  they  have 
greatly  increased  and  are  now  approximately  as  wide  apart  as 
they  were  back  in  the  seventies.  In  the  case  of  oats  the  differ- 
ence is  actually  greater.  It  will  be  observed  that  this  great 
spread  in  prices  between  the  east  and  the  west  since  1915  is 
coincident  with  the  recent  increase  in  freight  rates. 

While  the  decrease  in  these  differences  was  going  on  because 
of  decrease  in  transportation  costs,  there  was  a  rapid  reduction 
in  acreage  of  the  cereals  in  New  England,  amounting  between 
1880  and  1909  to  46%.  Following  the  Civil  War  the  differ- 
ence in  prices  east  and  west  was  sufficiently  great  to  justify 
the  New  England  dairyman  in  growing  grain  for  feed;  but 
as  the  cost  of  getting  grain  from  the  west  fell  it  became  more 
and  more  advantageous  to  the-  New  England  dairyman  to  buy 
his  concentrated  feed.  This  accounts  for  the  reduction  in  the 
acreage  of  cereals.  That  the  New  England  farmer,  if  present 
conditions  continue,  will  go  back  to  growing  grain  is  shown  by 
the  fact  that  during  the  period  of  high  prices  prevailing  in  war 
times  the  acreage  of  wheat  in  New  Hampshire  increased  from 
practically  nothing  to  1,400,  and  oats  increased  from  11,000 
to  15,000  acres.  The  acreage  of  rye  more  than  doubled.  In 
Vermont  wheat  increased  from  700  to  11,000  acres  and  oats 
from  71,500  to  83,100  acres.     A  similar  increase  occurred  in 


THE  FARMERS  AND  THE  RAILROADS 


335 


Massachusetts.  It  is  true  this  increase  occurred  under  high 
transportation  rates,  but  the  high  prices  of  farm  products  at 
the  time  made  these  rates  relatively  no  greater  than  they  had 


PRICES  IN  PRODUCING  AND  CONSUMING  SECTIONS 

COMPARED 

INDEX  OF  FARM  PRICES  OF  CORN,  WHEAT  AND  OATS. 

UNITED  STATES,  NEW  ENGLAND  AND  WEST  NORTH  CENTRAL  STATES.  • 

5  YEAR  AVERAGES  OF  DECEMBER  FIRST  PRICES. 

1S71-1915  and  1921. 

100=  AVERAGE  FOR  UNITED  STATES. 

Small  figures  on  chart  are  actual  prices. 


PRICE 
INDEX 

190 

ISO 

170 

160 

150 

140 

130 

120 

110 

100 

90 

80 

70 

60 

50 


-AVERAGE  FOR  THE  UNITED  STATES 


WEST  NORTH  CENTRAL  STATES 


1S71-75  12S2-S6  1331-95  1901-05  1911-15   1921* 
•Wheat  Kcnthly  averase  for  year.  Corn  and  oats  Dec.  1 


PRICE 

INDEX 

190 
ISO 
170 
160 
150 
llJO 

130 

120 
110 

100 

90 
so 

70 
60 
50 


been  before  the  War.  The  case  is  different  now,  for  the  prices 
of  farm  products  are  lower.  There  appears  to  be  no  escape 
from  the  conclusion  that  unless  there  is  a  material  reduction  in 
cost  of  transportation,  New  England  will  soon  be  producing 


336  RAILROADS  AND  BUSINESS  PROSPERITY 

again  the  concentrated  feed  she  requires.  The  loss  in  profit 
to  the  railroads  this  will  occasion  is  no  small  item  to  many  of 
the  roads  supplying  this  section  of  the  country. 

To  discuss  in  detail  the  effects  upon  agriculture  and  industry 
in  general  of  the  advances  in  freight  rates  of  the  past  four 
years  would  require  hours  and  days  rather  than  minutes.  In 
brief,  if  the  present  high  rates  are  continued  for  any  length 
of  time  their  probable  effect  will  be : 

First,  to  favor  the  farmers  of  South  America  and  Australia 
at  the  expense  of  our  own  farmers,  and  all  the  more  so  be- 
cause of  the  substantial  decreases  in  ocean  rates. 

Second,  to  keep  prices  of  farm  products  in  the  large  surplus- 
producing  states  at  figures  lower  than  are  justified  by  the  in- 
vestment in  land  and  equipment  and  cost  of  farm  production, 
except  during  years  of  short  crops. 

Third,  to  prolong  the  period  of  dissatisfaction  among  farm- 
ers and  encourage  advocates  of  economic  fallacies  of  all  sorts. 

Fourth,  to  improve  the  position  of  eastern  truck-  and  fruit- 
growers, but  also  to  add  considerably  to  the  cost  of  production 
of  milk  and  dairy  products,  because  of  the  advanced  prices  of 
hay  and  coarse  grains  necessarily  shipped  in  from  the  west. 

Fifth,  gradually  to  shift  industrial  enterprises  westward, 
nearer  the  surplus  food  producing  territory. 

Sixth,  to  promote  sectional  rather  than  national  spirit  and 
make  more  and  more  difficult  large  national  policies  with  re- 
spect to  international  affairs. 

No  good  citizen  can  find  comfort  or  satisfaction  in  con- 
templating such  results. 

I  am  not  making  a  special  plea  for  the  farmer  as  against  the 
railroad.  The  relation  between  agriculture  and  transportation 
is  so  very  intimate  and  dependent  that  neither  can  afford  to 
acquiesce  in  a  condition  which  seriously  affects  the  other. 
They  must  work  together  in  harmony  and  understanding.  The 
important  point  I  am  trying  to  make  is  this :  That  this  nation 
has  been  built  up  by  a  system  of  low  railroad  rates  designed 
to  encourage  the  movement  of  our  surplus  agricultural  crops 
long  distances  to  manufacturing,  industrial  and  business  cen- 
ters, with  a  corresponding  return  haul  of  manufactured  pro- 
ducts, and  that  a  sudden  reversal  of  this  theory  of  rate-making 


THE  FARMERS  AND  THE  RAILROADS  337 

results  in  great  economic  injustice  and  if  persisted  in  will  keep 
us  in  a  state  of  confusion  and  agricultural  and  business  uncer- 
tainty for  a  prolonged  period.  The  need  of  permitting  the 
railroads  to  charge  rates  sufficiently  high  to  cover  reasonable 
costs  of  operation  and  maintenance  and  yield  a  fair  return 
upon  the  capital  invested  is  so  obvious  that  it  must  at  once  be 
conceded.  Both  commerce  and  agriculture  require  efficient 
transportation.  But  the  folly  of  undertaking  to  establish 
such  rates  wholly  without  consideration  of  their  disastrous 
effect  upon  agriculture,  the  greatest  industry  of  the  country, 
is  now  apparent  to  everyone. 

The  most  hopeful  sign  at  the  present  time  is  the  apparent 
recognition  of  the  railroad  management  that  our  present  high 
rates  cannot  be  continued  without  disaster  to  the  railroads 
themselves,  and  that  rates  must  come  down  to  a  point  not  far, 
if  any,  above  the  pre-war  levels.  Railroad  management  should 
have  the  whole-hearted  support  of  all  right-minded  and  clear- 
thinking  people  in  taking  the  steps  which  will  make  it  possible 
to  bring  about  the  necessary  reduction. 


TRANSPORTATION  ACT  OF  1920 

DANIEL  WILLARD 
President,  Baltimore  and  Ohio  Railroad  Company 

THE  framing  of  the  Transportation  Act  of  1920  was  pre- 
ceded by  one  of  the  most  exhaustive  investigations  ever 
conducted  by  Congress,  and  the  Act  in  its  present  form 
undoubtedly  reflects  the  enlightened  effort  of  that  body  to  deal 
with  the  American  railroad  problem  in  a  constructive  and 
effective  manner. 

It  is  desirable  that  we  have  a  clear  understanding  of  just 
what  the  American  railroad  problem  really  is  before  we  attempt 
to  decide  how  it  should  be  dealt  with.  What  we  are  in  the 
habit  of  speaking  of  as  the  American  railway  system  is,  of 
course,  not  a  system  at  all  in  the  sense  in  which  the  word 
"  system  "  is  ordinarily  used.  It  is  not,  for  instance,  such  a 
system  as  we  have  in  mind  when  we  speak  of  the  Pennsylvania 
or  Santa  Fe  Systems,  nor  is  it  like  the  American  Telephone  and 
Telegraph  Company,  which  latter  includes  under  one  general 
management  or  supervision  a  network  of  wires  reaching  all 
parts  of  the  United  States.  When  we  speak  of  the  American 
railway  system  we  have  in  mind,  I  suppose,  the  1,800  or  more 
separate  and  independent  railroad  companies  in  the  United 
States,  owning  and  operating  steam  railroads,  with  a  total 
length  of  about  265,000  miles,  having  in  the  aggregate  about 
2,500,000  freight  cars,  about  65,000  locomotives  and  about 
56,000  cars  used  in  passenger  train  service — all  representing  a 
total  investment  of  approximately  $20,000,000,000  and  giving 
direct  employment  to  upwards  of  2,000,000  persons.  The 
American  railroad  problem,  as  it  is  called,  grows  out  of  the 
question  :  how  can  this  great  aggregate  property,  represented 
by  an  investment  of  $20,000,000,000,  be  so  developed,  main- 
tained and  operated  as  to  furnish  the  people  with  adequate 
transportation  at  reasonable  rates? 

The  steam  railroad  has  ceased  to  be  a  new  thing  and  certain 
fundamental  truths  concerning  the  railroad  problem  have  been 
so  clearly  demonstrated  that  they  may  now  be  accepted  as  estab- 


TRANSPORTATION  ACT  OF  1920  339 

lished.  One  of  the  fundamental  truths  which  I  have  in  mind 
is  this  :  Whatever  policy  of  ownership,  control  or  operation  may 
be  adopted  with  reference  to  our  American  railroads,  it  must 
make  satisfactory  provision  so  that  in  times  of  emergency  it 
will  be  possible  to  mobilize  and  coordinate  promptly  all  of  the 
physical  properties  of  all  the  companies  in  order  that  the  rail- 
road plant  as  a  whole  may  be  used  in  the  most  effective  manner 
possible.  Such  coordination  we  know  is  possible  under  gov- 
ernment operation.  Such  coordination  was  attempted  by  the 
railroads  themselves  in  1917,  and  with  a  much  greater  degree 
of  success  than  is  generally  recognized,  through  the  agency  of 
the  Railroad  War  Board,  which  they  voluntarily  established 
in  April  of  that  year.  The  War  Board,  however,  had  no  legal 
status,  and  as  the  laws  were  at  that  time,  its  efforts  were  much 
hampered  and  interfered  with.  A  satisfactory  settlement  of 
the  railroad  problem  demands  among  other  things  that  suitable 
provision  be  made  by  law  for  the  prompt  mobilization  and  co- 
ordination of  the  railway  properties  when  necessary  in  the 
public  interest. 

The  Transportation  Act  of  1920,  therefore,  specifically  pro- 
vides that  in  times  of  emergency  the  Interstate  Commerce 
Commission  shall  be  authorized  to  assume  direction  and  control 
of  all  the  cars  and  engines  of  all  the  railroads  in  the  United 
States,  as  if  they  were  in  fact  owned  and  controlled  by  the 
government,  and  it  authorizes  the  Commission  to  take  such 
further  steps  as  may  be  necessary  to  give  effect  to  this  provision 
of  the  Act.  It  should  be  borne  in  mind,  however,  that  this 
broad  authority  which  the  Commission  is  authorized  to  assume 
over  private  property  is  to  be  exercised  only  in  times  of 
emergency.  Congress  undoubtedly  recognized  the  fact  that  it 
is  not  possible  to  have  complete  coordination  and  unified  oper- 
ation of  all  the  railroads  and  at  the  same  time  have  the  benefit 
of  competition.  The  two  things  are  incompatible.  It  was  be- 
lieved, and  I  think  justifiably  so,  that  while  it  was  necessary 
in  the  public  interest  to  provide  for  the  effective  mobilization 
of  all  the  railroad  facilities  in  times  of  emergency,  it  was  also 
desirable  in  the  public  interest  that  except  in  times  of  emer- 
gency the  individual  companies  should  be  given  the  fullest  op- 
portunity for  individual  initiative,  enterprise  and  competition. 

I  believe  the  Transportation  Act  of  1920  effectively  provides 


i 


840  RAILROADS  AND  BUSINESS  PROSPERITY 

for  that  phase  of  the  railroad  problem,  and  my  belief  is  based 
upon  the  knowledge  that  during  the  fiscal  year  1920,  when  it 
may  be  said  there  was  a  transportation  emergency  such  as  was 
contemplated  in  the  words  of  the  Act,  the  American  railroads, 
acting  under  its  provisions  and  in  cooperation  with  the  Inter- 
state Commerce  Commission,  so  coordinated  their  efforts  that 
in  the  aggregate  they  moved  over  447  billion  ton-miles  during 
the  year.  This  was  7  billion  ton-miles  greater  than  the  high- 
est previous  accomplishment,  which  was  in  1918,  while  the 
roads  were  under  Federal  control.  The  importance  of  being 
able  to  mobilize  promptly  all  of  the  railroad  facilities  in  times 
of  emergency  is  so  great  that  had  it  not  been  possible  to  provide 
satisfactorily  therefor  in  connection  with  private  ownership 
and  operation,  it  is  altogether  likely  that  Congress  would  have 
felt  compelled  to  accept  the  policy  of  Government  ownership 
and  operation  as  the  only  possible  alternative. 

Congress,  however,  having  decided  that  it  was  possible  under 
proper  legislation  effectively  to  coordinate  the  railway  facilities 
when  necessary,  or  in  times  of  emergency,  and  having  made 
suitable  provision  by  law  for  such  coordination,  then  gave  con- 
sideration to  another  phase  of  the  railroad  problem  as  related 
to  private  ownership  and  operation. 

Of  course,  it  is  recognized  that  if  we  are  to  have  private 
ownership  and  operation  of  the  railroads,  it  can  only  be  had 
upon  a  voluntary  basis.  No  one,  under  institutions  such  as 
ours,  can  be  forced  against  his  will  to  invest  his  money  in  rail- 
roads. At  the  same  time  it  is  recognized  that  at  least 
$500,000,000,  and  probably  more,  must  be  expended  each  year 
by  the  railroads  for  new  facilities  in  order  that  they  may  pro- 
vide for  the  demands  of  our  growing  commerce,  and  unless 
railway  securities  can  be  made  "so  attractive  that  each  year  at 
least  $500,000,000  of  new  capital  will  seek  investment  in  that 
direction,  then  the  scheme  of  private  ownership  will  fail,  be- 
cause we  cannot  as  a  people  afford  to  have  inadequate  trans- 
portation facilities.  But  whether  railway  securities  are  attrac- 
tive or  not  from  the  investors'  point  of  view  depends,  of  course, 
upon  the  rate  and  dependability  of  return  and  the  certainty  of 
ultimate  recovery  of  the  capital  invested. 

Congress,  with  a  full  understanding  of  this  phase  of  the 
problem,  for  the  first  time  laid  down  for  the  guidance  of  the 


TRANSPORTATION  ACT  OF  1920  341 

Interstate  Commerce  Commission  a  definite  rule  to  be  fol- 
lowed with  reference  to  the  fixing  of  the  rates  and  charges 
which  the  railways  might  lawfully  impose.  What  Congress  in 
effect  did  was  to  announce  a  policy,  and  in  harmony  therewith 
it  authorized  and  directed  its  agent,  the  Interstate  Commerce 
Commission,  to  fix  rates  and  charges  so  that  the  railroads  as  a 
whole,  or  as  a  whole  in  certain  regions  or  groups,  should  be 
able,  in  connection  with  honest  and  efficient  management,  to 
earn  a  net  operating  income  equal  as  nearly  as  may  be  to  a  fair 
return  upon  the  value  of  the  property  devoted  to  transportation 
purposes.  Nothing  was  said  in  the  Act  about  the  rate  of 
return  upon  the  stocks  and  bonds  of  the  railroads.  As  a 
matter  of  fact  there  is  no  mention  in  the  law  of  either  railroad 
stocks  or  bonds,  nor  is  there  a  guarantee  of  any  definite  return 
as  some  have  seemed  to  think,  but  simply  the  statement  that 
the  railroads  as  a  whole  should  be  entitled  to  receive  a  fair 
return,  if  honestly  and  efficiently  managed,  upon  the  value  of 
the  property  devoted  to  the  public  use. 

However,  because  the  railroads  are  not  all  in  one  compact 
system,  because  there  are  in  fact  several  hundred  separate  and 
independent  companies,  because  some  roads  are  more  favor- 
ably located  than  others,  and  because  it  was  recognized  that 
different  roads  running  between  the  same  points  should,  and  as 
a  matter  of  fact  must,  charge  the  same  rates,  it  was  therefore 
recognized  that  rates  which  might  be  high  enough  to  yield  a 
fair  return  to  some  of  the  carriers,  might  not  yield  an  adequate 
return  to  others  in  the  same  group.  It  was  realized  also  that 
the  identical  rates  might  yield  to  still  other  carriers  in  the 
same  group  a  higher  return  than  could  be  justified  from  the 
public  point  of  view. 

It  is  essential  in  the  public  interest,  however,  that  all  the 
roads,  generally  speaking,  should  be  able  to  survive  and  at  the 
same  time  properly  maintain  and  enlarge  their  facilities  as 
circumstances  may  require.  To  overcome  the  difficulties  re- 
sulting from  the  conditions  just  referred  to,  it  is  provided  in 
the  Act  that  if  from  rates  fixed  so  as  to  yield  a  fair  return  upon 
the  value  of  all  the  roads  in  a  specific  group,  certain  individual 
companies  in  the  same  group  should  be  able  to  earn  more  than 
six  per  cent  upon  the  value  of  their  property,  then  in  that  case 
one-half  of  the  net  operating  income  earned  above  six  per  cent 


342  RAILROADS  AND  BUSINESS  PROSPERITY 

from  rates  so  fixed  should  be  recoverable  by  the  government. 
This  feature  of  the  Act  has  been  much  criticized,  and  by  many 
has  been  held  to  be  unconstitutional.  Personally,  I  do  not 
believe  it  is  possible  for  private  ownership  of  the  railroads  to 
endure  in  this  country  without  such  a  provision  as  this  in 
the  Act.  As  a  practical  matter  without  such  a.  provision  in  the 
Act,  I  do  not  believe  that  politically  appointed  agencies,  in  face 
of  the  opposition  which  might  be  urged,  would  approve  rates 
high  enough  to  yield  a  fair  return  upon  the  properties  as  a 
whole  constituting  a  group  for  rate-making  purposes,  when  it 
was  clear  that  from  a  lower  or  existing  basis  of  rates  one  or 
more  companies  in  the  same  group  could  earn  an  operating  in- 
come in  excess  of  the  requirements  from  an  investment  point 
of  view.  The  result  would  be  that  while  some  of  the  railroads 
might  be  very  prosperous  and  others  might  manage  to  live, 
still  others  less  fortunately  situated  might  not  be  able  to  survive 
as  commercial  enterprises,  and  consequently  they  would  be  un- 
able to  furnish  adequate  transportation  to  that  part  of  the 
public  depending  upon  them  for  service. 

It  was  therefore  thought  better  and  more  in  the  public  inter- 
est that  rates  should  be  fixed  high  enough  to  yield  a  fair  return 
upon  all  of  the  property  used  for  transportation  purposes  in  any 
particular  group  of  competitive  lines,  even  though  some  roads 
might  be  able  to  earn  a  sufficient  return  on  a  lower  rate  basis. 
Inasmuch,  however,  as  the  more  fortunate  roads  would  benefit 
by  the  higher  rate  basis  necessary  to  sustain  the  less  fortunate 
roads,  Congress  decided  that  whatever  was  earned  above  six 
per  cent  upon  the  property  value  of  any  particular  road  from 
rates  so  fixed,  should  be  divided  equally  between  the  road  and 
the  government. 

I  repeat  that  in  my  opinion  private  ownership  and  operation 
of  the  railroads  in  this  country  can  not  endure  without  some 
such  provision,  nor  do  I  think  the  provision  which  I  have  just 
referred  to  is  in  itself  unfair  or  inequitable.  Undoubtedly  if 
it  were  not  for  the  necessity  of  the  less  fortunate  roads,  the  more 
fortunate  ones  would  not  be  permitted  to  charge  the  higher 
rates.  The  very  fact  that  some  roads  in  a  group  are  fortunate 
enough  to  be  able  to  earn  more  than  six  per  cent  upon  the  value 
of  their  property,  even  though  part  of  such  excess  is  recoverable 
by  the  government,  puts  the  securities  of  such  companies  in  a 


TRANSPORTATION  ACT  OF  1920  343 

preferred  class,  and  because  such  companies  are  permitted  to 
retain  one-half  of  all  they  can  earn  above  six  per  cent,  there 
would  seem  to  be  ample  inducement  to  stimulate  initiative  and 
enterprise.  Personally,  I  approve  of  this  particular  feature  of 
the  Act,  and  I  venture  to  express  the  hope  that  its  constitu- 
tionality will  be  upheld  in  the  courts.  Otherwise  I  feel  that 
rates  will  not  be  maintained  on  a  basis  sufficiently  high  to  sus- 
tain the  roads  in  general,  in  which  event  private  ownership 
and  operation  of  the  railroads  as  a  national  policy  will  fail. 
Congress,  having  satisfied  itself  that  it  was  possible  under 
private  ownership,  with  suitable  legislation,  for  the  railroads 
to  be  coordinated  in  times  of  emergency,  then  addressed  itself 
to  the  financial  phase  of  the  problem,  which  it  undertook  to 
solve  by  the  establishment  of  a  rule  for  rate-making,  as  I  have 
shown. 

There  still  remained  to  be  dealt  with  one  other  important 
phase  of  the  problem,  to  which  I  shall  now  refer.  In  no  other 
country  in  the  world  do  the  people  make  so  great  a  use  of  the 
railroads  as  in  ours.  The  steam  railroads  in  the  United  States 
perform  a  freight  service  equal  to  the  movement  of  4,000  tons 
one  mile  per  annum  for  each  man,  woman  and  child  of  our 
entire  population,  while  the  latest  figures  available  show  that  in 
Europe  the  analogous  service  performed  by  the  railroads  is 
probably  less  than  600  tons  one  mile  per  capita  per  annum. 

The  greater  use  made  of  the  railroads  by  the  people  in  this 
country  is  of  course  influenced  largely  by  the  fact  that  ours  is 
a  country  of  great  distances  and  is  also  rich  in  natural  and 
varied  resources.  It  has  come  about,  therefore,  that  in  the 
City  of  New  York,  an  an  example,  the  flour  used  is  very  likely 
made  from  wheat  grown  on  the  rich  prairies  of  Minnesota  and 
the  Dakotas.  The  beef  which  is  eaten  here  was  perhaps  bred 
in  Texas,  developed  in  Wyoming,  fattened  in  Iowa  and  dressed 
in  Chicago.  Not  only  do  we  find  upon  the  tables  in  New  York 
and  Boston  salmon  caught  in  the  waters  on  the  Pacific  Coast 
and  shipped  from  Seattle,  but  there  will  also  be  found  on  the 
tables  in  Seattle  the  cod  caught  in  the  North  Atlantic  waters 
and  shipped  from  Boston.  Many  similar  instances  might  be 
cited.  In  short,  it  has  generally  been  found  advantageous,  be- 
cause more  economical,  to  produce  our  flour,  meats,  minerals, 
forest  products  etc.  where  each  can  be  produced  or  obtained  at 


344  RAILROADS  AND  BUSINESS  PROSPERITY 

the  lowest  initial  cost  and  then  transport  them,  largely  by  rail, 
to  the  point  of  ultimate  consumption,  the  entire  transportation 
cost  being  less  than  the  difference  in  initial  cost  of  production 
in  different  parts  of  the  country.  With  this  in  mind  it  is  mani- 
festly important  that  there  should  be  regularity  and  continuity 
of  service  by  the  railroads,  and  one  of  the  important  problems 
before  Congress  was  to  insure  if  possible  such  continuity  by 
guarding  against  interruption  of  service  which  might  be  caused 
by  misunderstandings  and  disputes  arising  between  the  railroad 
managers  and  their  employees. 

It  was  urged  by  some  that  this  provision  of  the  Act  should 
be  so  written  as  to  prohibit  strikes  upon  the  railroads.  It  was 
not  possible  to  enact  legislation  of  that  character,  nor  do  I 
think  it  would  have  been  wise  to  enact  such  legislation  at  that 
time.  I  believe  it  would  be  a  mistake  for  Congress  to  pass  a 
law  prohibiting  strikes  unless  we  are  quite  certain  that  we  shall 
be  able  to  enforce  such  a  law  once  it  has  been  enacted.  Per- 
sonally I  do  not  believe  that  we  have  reached  a  stage  where  we 
can  feel  confident  that  such  a  law  would  or  could  be  effec- 
tively enforced.  The  matter  was,  therefore,  dealt  with,  I  think, 
in  the  wisest  way  possible  under  the  circumstances.  Congress 
created  machinery  and  set  up  agencies  by  virtue  of  which  the 
employees  could  feel  assured  of  obtaining  just  as  fair  wages 
and  working  conditions  without  striking  as  they  could  reason- 
ably expect  to  obtain  even  if  they  did  strike. 

The  Act  provides,  first,  that — 

It  shall  be  the  duty  of  all  carriers  and  their  officers,  employees  and 
agents  to  exert  every  reasonable  effort  and  adopt  every  available 
means  to  avoid  any  interruption  to  the  operation  of  any  carrier  grow- 
ing out  of  any  dispute  between  the  carrier  and  the  employees  or  sub- 
ordinate officials  thereof.  All  such  disputes  shall  be  considered  and, 
if  possible,  decided  in  conference  between  representatives  designated 
and  authorized  so  to  confer  by  the  carriers,  or  by  the  employees  or 
subordinate  officials  thereof,  directly  interested  in  the  dispute.  If  any 
dispute  is  not  decided  in  such  conference,  it  shall  be  referred  by  the 
parties  thereto  to  the  Board,  which,  under  the  provision  of  this  title, 
is  authorized  to  hear  and  decide  such  dispute. 

The  Act  also  provides  for  the  creation  of  the  Board  above 
referred  to  and  in  that  respect  reads  as  follows  :  "  There  is  here- 
by established  a  board  to  be  known  as  the  Railroad  Labor 
Board  and  to  be  composed  of  nine  members." 

The  members  of  the  Labor  Board  are  to  be  appointed  by  the 


TRANSPORTATION  ACT  OF  1920  345 

President.  Three  of  his  appointees  shall  be  from  men  nomin- 
ated by  railroad  employees,  three  shall  be  from  men  nominated 
by  the  railroad  companies,  and  three  shall  be  selected  by  the 
President  himself,  as  representing  in  a  larger  way  the  general 
public,  and  all  nine  shall  be  confirmed  by  the  Senate.  In  fact, 
Congress  has  created  for  this  particular  purpose  a  special  Labor 
Court  consisting  of  the  same  number  as  the  Supreme  Court 
of  the  United  States,  appointed  in  the  same  way,  that  is  to  say, 
by  the  President  and  confirmed  by  the  Senate,  and  has  given  the 
Board  or  Court  a  status  and  dignity  in  keeping  with  its  im- 
portance. The  Act  says  that  it  shall  be  the  duty  of  the  Bxmrd 
to  establish  rates  of  pay  and  standards  of  working  conditions 
which,  in  the  opinion  of  the  Board,  shall  be  just  and  reasonable, 
and  in  determining  the  justness  and  reasonableness  of  such 
rates  the  Board  is  directed  to  take  into  consideration,  among 
other  things — 

1.  The  scale  of  wages  paid  for  similar  kinds  of  work  in  other 
industries  ; 

2.  The  relation  between  wages  and  the  cost  of  living; 

3.  The  hazards  of  the  employment; 

4.  The  training  and  skill  required ; 

5.  The  degree  of  responsibility ; 

6.  The  character  and  regularity  of  the  employment;  and 

7.  Inequalities   of  increases  in  wages  or  of  treatment,  the 
result  of  previous  wage  orders  or  adjustments. 

It  may  indeed  be  said  that  Congress  by  this  Act  has  made 
a  preferred  class  of  the  railroad  workers,  because  so  far  as  I 
know  this  is  the  first  and  only  time  that  Congress  has  ever 
definitely  enacted  that  any  particular  class  of  the  people  should 
be  given  at  all  times  and  under  all  circumstances  just  and  rea- 
sonable wages  and  working  conditions.  Of  course,  Congress 
did  not  do  this  primarily  in  the  interest  of  the  workers.  Con- 
gress acted  only  as  it  had  a  right  to  act  in  the  interests  of  the 
nation  as  a  whole.  Congress  acted  with  a  full  realization  of 
the  importance  of  an  uninterrupted  transportation  service  in  a 
country  such  as  ours,  but  being  unwilling  to  deprive  the  work- 
ers of  their  right  to  strike,  it  sought  to  provide  machinery 
which  would  make  it  unnecessary  under  any  circumstances  for 
the  men  to  stop  work  in  order  to  obtain  just  and  reasonable 


346  RAILROADS  AND  BUSINESS  PROSPERITY 

treatment.  In  short,  Congress  provided,  or  aimed  to  provide 
by  law,  that  the  railroad  workers  should  at  all  times  be  assured 
of  just  as  good  wages  and  just  as  good  working  conditions 
without  striking  as  they  could  reasonably  expect  to  secure  even 
if  they  did  strike,  for  it  is  clear  that  no  one  could  justify  or  ex- 
pect to  win  a  strike  for  wages  or  working  conditions  that  would 
be  unjust  or  unreasonable.  This  feature  of  the  Act  has  been 
much  criticised,  but  I  venture  to  think  that  during  the  short 
time  the  Act  has  been  in  effect,  the  labor  provision  has  more 
than  justified  itself  by  actual  results  achieved  when  viewed 
in  a  large  way. 

It  may,  of  course,  be  said  that  each  one  of  the  three  features 
of  the  Act  which  I  have  been  discussing  is  in  a  sense  experi- 
mental. Nevertheless,  it  is  my  feeling  and  firm  belief  that  so 
far  it  cannot  be  said  that  the  experiment  has  failed  in  con- 
nection with  any  one  of  the  features  mentioned.  On  the  con- 
trary it  seems  to  me  that  the  results  so  far  obtained,  when 
fairly  considered,  have  measurably  met  the  proper  expectation 
of  Congress. 

There  are  other  important  features  of  the  Transportation 
Act  to  which  I  have  not  referred  at  all,  chiefly  because  of  my 
limited  time  and  because  I  do  not  consider  them  of  fundamental 
importance.  One  of  the  provisions  which  I  have  in  mind  has 
reference  to  the  future  grouping  of  the  railroads  into  a  rela- 
tively small  number  of  strong,  competing  lines.  I  am  in  favor 
of  the  general  policy  so  announced.  I  do  not,  however,  con- 
sider it  of  fundamental  importance. 

I  believe  that  the  Transportation  Act  of  1920  affords  a  work- 
able basis  for  the  future  successful  operation  of  the  railroads 
in  the  United  States,  in  harmony  with  our  long-established 
policy  of  private  ownership  and-  operation.  That  the  success 
of  the  Act  has  not  yet  been  thoroughly  demonstrated  in  all  of 
its  aspects,  I  admit.  I  believe,  however,  that  it  would  be  a 
great  mistake  to  attempt  to  amend  or  change  the  Act  in  any 
of  its  fundamental  features  at  the  present  time.  I  do  not  think 
we  have  yet  had  sufficient  experience  under  the  Act  to  justify 
a  conclusion  that  a  change  is  actually  necessary  or,  if  necessary, 
to  indicate  clearly  what  the  change  should  be.  I  firmly  believe 
that  if  the  Act  is  permitted  to  remain  as  it  is  for  a  period  of 
five  years,  and  if  the  railway  managers  could  be  assured  that 


TRANSPORTATION  ACT  OF  1920  347 

it  would  not  be  changed  within  that  period  of  time,  such 
knowledge  would  have  a  most  stimulating  and  encouraging 
effect,  not  only  upon  the  railway  managers,  but  upon  investors 
as  well,  and  would  in  itself  go  far  to  assure  the  success  of  the 
Act.  Undoubtedly  the  Act  is  not  perfect  in  all  its  details. 
Nevertheless  I  believe  that  in  its  present  form  it  makes  private 
ownership  and  operation  of  the  railroads  possible,  and  that  too 
on  a  basis  much  to  be  preferred  to  the  only  probable  alternative. 
I  urge,  therefore,  that  the  Act  in  its  present  form  be  given  a 
fair  and  sympathetic  trial. 


THE  NEW  BASIS  OF  RATE-MAKING 

WALKER  D.  HINES 
•  Former  Director  General  of  Railroads 

1WANT  to  express  at  the  outset  my  cordial  belief  in  the 
view  that  the  Transportation  Act  deserves  a  fair  and 
impartial  trial.  Even  if  we  were  passing  through  times 
that  were  entirely  normal,  it  would  still  be  true  that  an  act 
adopted  with  such  care  and  after  such  prolonged  investigation 
should  be  given  a  reasonable  time  within  which  to  justify  its 
usefulness.  But  the  truth  is  that  we  have  been  passing  through 
times  that  are  wholly  abnormal,  and  the  fact  that  in  such  times 
a  new  and  comprehensive  piece  of  legislation  may  not  have 
brought  satisfaction  to  the  interests  affected  by  it  is  not  proof 
that  it  is  not  a  forward  and  constructive  step.  I  do  not  know 
of  any  place  in  the  world  where  any  institution  or  any  scheme 
of  law  has  brought  satisfaction  to  the  people  in  these  war  years 
and  the  years  since  the  war.  So  I  think  we  must  give  to  this 
new  and  important  piece  of  legislation  an  opportunity  to 
justify  itself  when  we  again  get  into  something  approximating 
normal  times. 

I  think  it  is  particularly  important  to  emphasize  this  neces- 
sity because  it  is  undoubtedly  true  that  in  the  period  of  re- 
adjustment through  which  we  have  been  passing,  a  great  part 
of  our  population,  and  that  is  the  agricultural  part,  has  suf- 
fered most  intensely  from  the  unfortunate  combination  of  pre- 
war prices  or  less  for  its  products,  and  of  greatly  increased 
freight  rates  based  on  the  existing  much-increased  costs  of 
railroad  operations. 

This  has  been  a  condition  which  was  bound  to  produce 
discontent  and  it  was  bound  to  direct  attention  to  this  new 
legislation  as  the  most  obvious  reason  for  the  trouble,  although 
in  fact,  I  do  not  believe  that  the  legislation  can  be  held  re- 
sponsible. Under  any  other  possible  scheme  of  legislation,  we 
would   either  have   had    rates  approximately   as   high    as   the 

existing  rates  or  we  would  have  had  a  series  of  railroad  bank- 
348 


THE  NEW  BASIS  OF  RATE-MAKING  349 

ruptcies  which  would  have  been  infinitely  worse  for  the  farm- 
ers as  well  as  the  people  in  other  walks  of  life. 

I  want  to  say  something  about  the  principle  of  rate-making 
which  has  been  put  into  the  Transportation  Act.  I  shall  not 
attempt  again  to  outline  the  provisions  of  the  Act  on  this  point 
because  Mr.  Willard  has  done  that  clearly  and  concisely.  I 
want  to  emphasize  that  this  new  rate  basis  has  been  adopted 
from  the  standpoint  of  the  public  interest  and  that  public  inter- 
est is  vitally  concerned  in  the  maintenance  of  this  new  basis. 
The  provision  in  the  Transportation  Act  that  rates  should  be 
so  fixed  as  to  produce  a  fair  return  upon  the  aggregate  value 
of  railroad  property  was  not  put  there  merely  to  provide  inter- 
est and  dividends  for  the  holders  of  the  existing  bonds  and 
stocks  of  the  railroad  companies.  It  was  put  there  for  other 
broad  public  purposes,  in  addition  to  that  purpose,  and  I  wish 
to  call  attention  to  some  of  these  other  purposes. 

One  aspect  of  the  railroad  business  is  that  it  employs  about 
two  million  workmen.  In  a  normal  year,  I  suppose  there 
would  be  spent  by  the  railroads,  if  they  have  a  basis  of  rates 
that  yields  a  fair  return  upon  their  property,  from  two  and 
three-quarters  to  three  billion  dollars  in  wages.  The  dis- 
tribution of  that  amount  to  the  wage-earners  of  the  country 
would  be  a  tremendous  factor  in  the  prosperity  of  every  class 
of  people  in  the  country.  But  in  practice  there  is  much  more 
fluctuation  than  is  generally  appreciated  in  the  amount  of  rail- 
road labor  and  the  amount  of  the  railroad  pay  roll.  Even  if 
the  wages  remain  unchanged,  there  may  be  very  great  fluctu- 
ations in  the  number  of  employees,  in  the  amount  of  work  they 
are  called  on  to  do,  and  hence  in  the  amount  of  money  that  is 
distributed  to  them  as  wages.  The  moment  the  railroads  begin 
to  be  apprehensive  as  to  whether  they  are  obtaining  enough 
revenue  fairly  to  protect  the  interests  with  the  protection  of 
which  they  are  charged,  they  begin  to  lay  off  their  maintenance 
forces,  and  maintenance  represents  close  to  forty-five  per  cent 
of  the  total  operating  expenses  of  the  railroad  companies. 
When  the  maintenance  employees  are  laid  off,  the  purchasing 
power  of  themselves  and  their  families  is  impaired  and  to  a 
considerable  extent  dstroyed,  and  that  has  a  distinctly  un- 
favorable influence  upon  the  general  state  of  business  in  the 
country. 


350  RAILROADS  AND  BUSINESS  PROSPERITY 

The  moment  this  condition  becomes  an  influence  to  cut  down 
general  business — and  the  cutting  down  of  the  maintenance 
program  is  bound  to  have  that  influence — the  number  of  freight 
trains  begins  to  diminish,  the  number  of  employees  in  the  train 
service  is  cut  down,  and  you  have  an  additional  element  which 
makes  for  a  slowing  down  of  the  prosperity  of  the  country. 

Let  us  look  now  at  the  material  which  the  railroads  buy.  I 
suppose  it  is  lair  to  estimate  that  in  the  course  of  a  year  under 
approximately  normal  conditions,  the  railroads  would  buy  from 
a  billion  eight  hundred  million  to  two  billion  dollars'  worth 
of  materials,  which  are  used  in  the  operation  of  the  roads.  In 
addition  to  this,  in  normal  times,  they  would  ordinarily  buy 
perhaps  two  or  three  hundred  million  dollars'  worth  of  ma- 
terials for  the  purposes  of  new  construction.  The  railroads  buy 
nearly  one-third  of  the  soft  or  bituminous  coal  that  is  produced 
in  the  country.  It  has  been  estimated  that  they  buy  about  forty 
per  cent  of  the  steel  and  iron  articles  produced  in  the  country 
and  that  about  forty  per  cent  of  the  country's  lumber  production 
goes  directly  and  indirectly  into  materials  used  by  the  railroads. 

When  the  reasonable  return  to  the  railroads  begins  to  be 
seriously  diminished  and  there  comes  to  be  a  cutting-down  in 
these  purchases  of  materials,  as  there  is  bound  to  be  when  the 
maintenance  program  is  diminished,  or  when  the  construction 
program  is  diminished,  we  have  another  and  very  important 
condition  to  militate  against  the  prosperity  of  the  country. 
The  various  industries  of  the  country,  which  are  dependent  so 
largely  upon  the  railroads,  commence  limiting  their  operations, 
and  their  employees  lose  their  jobs  and  their  purchasing  power. 
The  volume  of  business  diminishes  still  more  and  again  we 
have  a  falling-off  in  the  amount  of  freight  service  and  in  the 
number  of  trains  and  enginemen  employed.  We  begin  to  have 
a  cutting-down  in  the  amount  of  coal  that  the  railroads  can 
consume,  with  consequent  embarrassment  to  the  coal  industry 
and  its  employees. 

It  follows  that  the  giving  of  a  fair  return  to  enable  them  to 
proceed  in  a  normal  manner  with  their  operations  has  a  tre- 
mendously important  relation  to  the  public  interest  with  respect 
to  the  labor  that  the  railroads  employ,  with  respect  to  the  ma- 
terials that  they  use,  and  with  respect  to  the  industries  which 
manufacture  these  materials,  and  in  all  these  respects  the  gen- 


THE  NEW  BASIS  OF  RATE-MAKING  351 

eral  prosperity  of  the  country  is  vitally  involved.  When  these 
factors  take  an  unfavorable  turn,  there  is  no  class  which  is  more 
seriously  affected  than  the  farming  class,  which  is  dependent 
upon  the  general  prosperity  of  the  country  in  order  to  have  a 
satisfactory  demand  for  its  products. 

Another  point  of  vital  interest  to  the  public  is  the  adequacy 
of  the  railroad  service.  That  involves  two  considerations  :  one 
is  that  the  railroads  of  this  country  are  not  in  a  condition  to 
handle  satisfactorily  the  amount  of  business  which  could  be 
regarded  at  present  as  normal.  They  need  much  additional 
equipment  and  many  sorts  of  improvements  in  order  to  meet 
more  satisfactorily  the  demands  of  the  public  for  an  adequate 
service.  This  requires  capital.  In  addition  there  is  a  steady 
growth  in  the  volume  of  business  done  in  this  country.  In 
1900  the  mount  of  freight  traffic  carried  was  double  what  it 
was  in  1890.  In  1910  it  was  eighty  per  cent  more  than  in 
1900.  In  1920  it  was  sixty  per  cent  more  than  in  1910.  So 
that  we  can  count  upon  a  continuing  and  heavy  increase  in  the 
normal  amount  of  business.  I  am  speaking  broadly  now  and 
disregarding  for  the  moment  the  fluctuations  that  may  come  in 
particular  years  of  depression.  With  this  increase  in  traffic 
there  must  be  enormous  increases  in  the  railroad  plant  and  they 
cannot  be  obtained  without  enormous  expenditures  of  money. 
I  think  Mr.  Willard  estimated  only  five  hundred  million  dol- 
lars a  year.  There  will  be  needed,  I  believe,  eight  hundred 
million  to  a  billion,  which  can  be  expended  in  the  further  im- 
provement and  extension  of  the  railroads  to  the  distinct  advant- 
age of  adequate  and  efficient  service,  although  I  can  readily 
appreciate  that  if  the  railroads  cannot  raise  that  much  addi- 
tional money  to  spend,  they  must,  and  no  doubt  they  can,  by 
spending  less  than  that  amount,  get  along  with  a  service  less 
satisfactory  than  it  ought  to  be. 

Such  enormous  amounts  of  capital  cannot  be  raised  unless 
there  is  adequate  assurance  of  a  fair  return  to  the  railroads, 
and  there  again  we  have  an  important  element  of  public  interest 
underlying  the  rate-making  principle  of  the  Transportation  Act. 

There  is  still  another  feature  embodied  in  this  rate-making 
principle  of  the  Transportation  Act,  and  that  is,  that  the 
Transportation  Act  was  designed  to  establish  a  greater  certainty 
as  to  a  fair  return  for  the  railroads. 


352  RAILROADS  AND  BUSINESS  PROSPERITY 

Prior  to  the  Transportation  Act,  the  attitude  of  the  Govern- 
ment was  restrictive  rather  than  constructive.  It  merely  told 
the  railroads  what  they  should  not  do,  but  assumed  no  obliga- 
tion to  aid  in  creating  a  rate  basis  which  would  affirmatively 
assure  them  a  fair  return.  That  contributed  to  a  condition  of 
uncertainty  which  was  unfavorable  to  the  public  interest.  The 
Transportation  Act  for  the  first  time  has  imposed  an  affirmative, 
express  duty  on  the  Interstate  Commerce  Commission  to  estab- 
lish a  rate  basis  which,  as  far  as  may  be,  will  yield  a  fair 
return.  This  provision  was  designed  to  establish  a  greater 
certainty,  and  I  think  that  is  one  of  the  most  important  elements 
of  public  interest  that  is  involved  in  this  new  conception. 

I  believe  as  the  railroads  become  better  assured  of  their 
status  there  can  and  will  be  developed  on  their  part  a  more 
confident  and  steady  policy  of  carrying  forward  on  a  more 
regular  and  normal  basis  their  maintenance  and  construction 
programs.  The  lack  of  public  interest  in  maintaining  a  fair 
return  was  always  working  to  make  the  return  uncertain. 
There  was  consequently  a  disposition  on  the  part  of  the  rail- 
roads to  respond  very  quickly  to  any  unfavorable  aspect  of 
general  business  by  promptly  cutting  down  their  maintenance 
and  construction  programs.  That  has  tremendously  accen- 
tuated the  tendencies  already  working  toward  depression  in 
general  business  conditions,  so  in  the  past  we  have  had  a  con- 
dition where  this  great  institution,  which  represents  the  greatest 
organized  purchasing  power  and  the  greatest  organized  source 
of  wages  in  the  country,  has  been  under  an  influence  which 
caused  it,  the  moment  there  came  to  be  signs  of  depression, 
to  convert  itself  into  an  agency  for  increasing  that  depression. 
And  that  picture  has  another  side.  When  business  begins  to 
get  better,  prices  begin  to  go  up.  and  labor  begins  to  get  scarce, 
the  railroads,  having  been  forced  to  cut  down  their  main- 
tenance and  construction  programs  in  times  of  depression,  then 
have  to  redouble  their  efforts  in  these  directions  and  thereby 
they  become  an  influence  for  creating  instability  by  putting  up 
the  price,  by  bidding  against  each  other  and  the  other  interests 
in  the  country,  in  order  to  make  up  for  their  deferred  programs 
in  times  of  depression.  Further  than  this,  the  result  of  such 
a  policy  has  been  that  in  a  time  of  returning  general  business 
prosperity  the  railroads  have  had  to  use  their  tracks,  equip- 


THE  NEW  BASIS  OF  RATE-MAKING  353 

ment  and  other  facilities  very  largely  for  handling  their  own 
material  and  supplies,  which  on  account  of  their  retrenchment 
policy  during  the  preceding  period  of  depression  they  had  not 
purchased  and  distributed  while  they  had  ample  surplus  equip- 
ment and  other  facilities.  This  has  led  to  congestion  of  busi- 
ness and  has  tended  to  accentuate  still  further  the  high  prices 
characteristic  of  returning  prosperity.  I  strongly  believe  this 
new  policy  of  the  Transportation  Act  is  calculated  in  large 
part  to  correct  these  highly  unfavorable  influences  and  to  enable 
the  railroads,  as  they  begin  to  feel  better  assured  of  the  con- 
tinuance of  this  new  policy,  to  adopt  a  more  regular  policy  of 
maintaining  more  uniformly  in  bad  times  their  normal  pro- 
grams of  maintenance  and  construction  and  thereby  help 
stabilize  the  conditions  of  the  whole  country,  rather  than  be 
forced  into  a  condition  of  intensifying  unfavorable  influences 
in  the  direction  either  of  further  depression  or  of  undue  ex- 
pansion. I  think  this  result  will  be  one  of  the  most  important 
and  salutary  effects  of  the  law,  and  will  constitute  one  of  the 
most  striking  ways  in  which  this  new  basis  will  be  in  promotion 
of  the  public  interests. 

I  fully  appreciate  that  the  adoption  of  a  policy  of  carrying 
forward  normal  programs  of  maintenance  and  construction  in 
times  of  business  depression  involves  some  difficult'complioations 
in  the  matter  of  cash,  because  the  railroad  maintenance  and 
construction  work  is  largely  a  cash  proposition.  All  employees 
engaged  in  such  work  must  be  paid  in  cash  and  all  materials 
used  in  it  must  be  bought  for  cash  or  on  very  short  time. 
Naturally  in  time  of  business  depression  railroad  companies 
cannot  generally  raise  on  satisfactory  terms  large  amounts  of 
capital  by  the  issue  of  stock  or  of  long-term  bonds,  and  they 
have  been  quite  hesitant  to  borrow  money  on  short-term  paper 
for  carrying  forward  maintenance  and  construction  work. 
Nevertheless  with  increased  assurance  of  a  definite  and  helpful 
governmental  policy  I  believe  the  railroad  companies  could  and 
ought  to  make  further  efforts  than  they  have  felt  justified  in 
making  in  the  past  to  provide  themselves  with  the  necessary 
cash  to  carry  forward  their  maintenance  and  construction  work 
in  times  of  depression  when  labor  is  more  plentiful  and  ma- 
terials are  cheaper,  and  when  they  have  ample  equipment  and 
other  facilities  for  handling  the  work  with  a  minimum  of  inter- 


354  RAILROADS  AND  BUSINESS  PROSPERITY 

ference  to  their  transportation  of  commercial  traffic.  Not  only 
will  this  be  to  their  own  direct  benefit,  but  it  will  immensely 
promote  the  general  public  interest,  and  hence  this  consider- 
ation in  itself  constitutes  a  highly  important  justification  for  the 
rate-making  principle  of  the  Transportation  Act. 

In  the  last  analysis  railroad  rates  will  depend  upon  the 
cost  at  which  railroad  transportation  can  be  carried  on.  This 
new  rate  basis  rests  on  the  assumption  that  this  cost  is  a  matter 
of  vital  importance.  It  assumes  that  the  railroads  must  be 
economically  and  efficiently  managed.  This  subject  is  to  be 
increasingly  a  matter  of  scrutiny  and  concern  on  the  part  of 
the  Interstate  Commerce  Commission.  With  such  scrutiny, 
and  with  the  efforts  on  the  part  of  the  railroad  managements, 
and  with  the  improvement  of  conditions  generally,  I  think  it  is 
fair  to  predict  that  there  will  be  such  reduction  in  the  unit 
cost  of  railroad  operation  that  to  a  large  extent  the  difficulties 
from  which  the  public  has  suffered — and  no  interest  has  suf- 
fered more  than  the  farmers — on  account  of  rates  out  of  pro- 
portion to  the  cost  of  the  products  transported,  will  be  over- 
come. So  believing  as  I  do  that  this  is  an  important  forward 
step,  and  being  utterly  unable  to  think  of  any  substitute  for  it 
which  will  begin  to  offer  as  great  promise  of  adequate  service, 
adequate  employment  of  railroad  labor,  adequate  consumption 
of  materials  produced  in  the  country,  or  as  great  promise  of  a 
definite  forward  movement  in  the  stabilizing  of  business  of  all 
sorts  throughout  the  country,  I  certainly  wish  to  add  my  voice 
in  favor  of  giving  the  Transportation  Act  a  thorough  and 
sympathetic  trial,  and  I  predict,  with  great  confidence,  that 
it  will  justify  itself  when  it  gets  normal  times  in  which  to  work. 


HOW  RAILROADS  ADAPT  THEMSELVES  TO 
NATIONAL  CONDITIONS 

ALBERT  SHAW 
Editor,  The  Review  of  Reviews 

TRANSPORTATION  is  in  itself  a  specialized  form  of 
business  which  has  problems  of  its  own.  In  its  aspect 
as  a  distinct  interest,  the  transportation  system — of 
which  the  railroads  constitute  the  larger  framework — is  subject 
constantly  to  inquiry  and  discussion  from  many  standpoints. 
But  the  railroads  thus  regarded  do  not  constitute  the  subject 
of  our  meeting  of  the  Academy  today.  It  is  the  economic 
situation  of  the  United  States,  as  inseparably  affected  by 
transportation  methods  and  policies,  that  is  before  us  for  our 
consideration. 

It  is  true  that  from  the  standpoint  of  investment  and  from 
that  of  organization  and  employment  the  railroads,  with  their 
related  industries  of  service  and  supply,  constitute  a  foremost 
economic  interest.  But  railroads  are  also,  as  an  everyday 
affair,  looked  upon  by  men  engaged  in  every  other  form  of 
production  and  exchange  as  a  subordinate  but  essential  factor 
in  their  own  operations.  The  producers  of  wheat  and  corn, 
as  well  as  the  producers  of  coal  and  steel,  think  of  railroads  not 
as  a  distinct  field  of  investment  and  of  employment  but  as  an 
agency  necessary  to  their  own  success.  Every  business  meas- 
ures its  own  prosperity  in  terms  of  market  and  price.  Trans- 
portation is  in  many  industries  the  vital  factor  in  measuring 
the  range  of  markets.  Freight  rates  go  far  to  determine  the 
habits  of  whole  communities  as  regards  the  things  that  they 
eat,  the  houses  that  they  build,  the  fuel  that  they  consume,  and 
the  particular  forms  of  employment  that  they  find  profitable. 

Considerable  changes  in  transportation  rates,  when  such 
changes  come  suddenly,  are  likely  to  disturb  complicated  move- 
ments to  such  an  extent  as  to  create  emergencies  in  some  lines 
of  business  and  to  produce  sharp  and  painful  crises  in  others. 
At  such  times,  the  demand  for  remedies  often  creates  confusion 

of  thought,  so  that  slow  and  far-reaching  policies  are  suggested 

355 


356  RAILROADS  AND  BUSINESS  PROSPERITY 

as  cures  for  transient  evils.  It  happened,  as  has  already  been 
explained  by  a  distinguished  speaker,  that  a  greatly  delayed 
advance  in  freight  rates  to  meet  the  needs  of  the  railroads  took 
effect  at  the  very  time  when  agricultural  prices  were  rapidly 
falling  by  reason  of  the  curtailment  of  European  markets.  To 
advocate  a  ship  canal  to  connect  our  Great  Lake  system  with 
Europe  by  way  of  the  St.  Lawrence,  as  a  remedy  for  this 
particular  crisis,  would  be  something  like  proposing  the  inven- 
tion and  adoption  of  new  methods  of  fire  prevention  at  the 
moment  of  an  actual  conflagration. 

If  one  is  considering  the  relation  of  railroads  to  business 
prosperity  in  the  more  permanent  sense,  it  becomes  important 
to  remember  that  the  railroad  systems  of  the  past  and  of  the 
present  are  merely  a  concrete  expression  of  the  phases  of  our 
economic  development  as  we  have  spread  across  the  country 
from  Atlantic  to  Pacific.  The  early  railroads  followed  the 
lines  of  pioneering  progress,  while  the  later  railroads  pushed 
ahead  in  order  to  aid  more  rapidly  in  the  settling  of  the  great 
West.  Nearly  all  of  the  problems  affecting  American  railroads 
are  best  understood  by  studying  them  in  close  relation  to  the 
facts  of  our  economic  history,  as  we  have  taken  vast  expanses 
of  new  country,  opening  up  agricultural  and  mineral  resources,, 
and  creating  communities  occupied  by  many  millions  of  settlers. 

The  transportation  methods  and  conditions  of  the  future  are 
also,  like  those  of  the  past,  to  be  vitally  related  to  changing 
conditions  in  the  nation's  development  as  a  whole.  There  will 
always  be  long-haul  business  for  the  railroads  in  ample  volume  ; 
but  there  will  be  a  relatively  increasing  intensity  of  short-haul 
traffic  movement  if  the  country  is  to  continue  to  expand  in  a 
normal  and  healthy  way.  Vast  surpluses  of  agricultural  pro- 
duction in  the  Mississippi  Valley  and  the  farther  West,  in  the 
nature  of  things,  are  a  temporary  phase.  Obviously  the  agri- 
cultural development  of  these  regions  was  destined  to  come 
first.  But  the  growth  of  towns  and  cities,  and  the  transplan- 
tation of  varied  industries,  were  sure  to  follow. 

To  an  increasing  extent  the  bread-stuffs,  the  beef  and  pork 
and  the  fruits  of  the  central  and  western  States  will  be  con- 
sumed by  populations  within  their  own  boundaries.  Europe 
is  not  destined  to  live  upon  the  wheat  of  the  United  States,  nor 
even  upon  that  of  Canada.      It  is  far  more  important  for  the 


HOW  RAILROADS  ADAPT  THEMSELVES  357 

interior  of  the  country  to  develop  its  own  transportation  sys- 
tems and  expand  its  own  varied  economic  life  than  to  advocate 
large  expenditures  which  would  look  to  future  markets  beyond 
the  Atlantic. 

The  group  system  as  proposed  in  the  new  Transportation 
Act  would  seem  to  be  in  accord  with  the  normal  tendencies  of 
the  country.  We  shall  continue  to  have  a  very  large  traffic 
that  is  national  in  its  scope.  New  England  will  make  articles 
that  will  be  sold  in  every  State.  The  citrous  fruits  of  Florida 
and  California  will  find  consumers  everywhere.  Natural  cen- 
ters for  the  production  of  iron  and  steel,  like  Pittsburgh  or 
Birmingham,  will  hold  preeminence  and  will  find  markets  be- 
yond their  own  districts.  But  the  tendency  will  be  towards 
intensive  regional  development.  The  agriculture  of  the  East, 
which  has  been  abnormally  depressed  and  neglected,  will  be 
revived  under  conditions  of  a  more  normal  and  permanent 
character.  Not  more  than  twenty-five  per  cent  of  the  fruit- 
growing capacity  of  the  Eastern  States  is  now  utilized. 

Obviously  it  is  highly  important  that  there  should  be  im- 
mediate study  of  freight  rates  with  a  view  to  adjustments  for 
the  lightening  of  specific  burdens.  But  our  recent  experiences, 
which  have  brought  distress  to  wide  regions  and  heavy  loss 
to  particular  industries,  will  have  been  attended  by  some  in- 
direct advantages.  Localities  will  see  the  greater  relative 
value  of  home  markets,  and  will  endeavor  to  import  industries 
rather  than  to  export  commodities. 

It  was  natural  enough  that  in  the  earlier  period  the  emphasis 
should  have  been  placed  upon  the  long-haul.  The  story  of 
the  transcontinental  lines,  of  the  eastern  trunk  lines,  of  the 
granger  lines,  all  has  to  do-  with  the  eastward  movement  of 
surplus  agricultural  products  and  the  westward  movement  of 
various  commodities  and  supplies.  A  marked  trend  toward 
equalization  of  average  conditions,  as  our  Western  States  be- 
came mature,  was  gradually  producing  changes  of  a  normal 
and  healthy  sort  when  the  great  European  war  reversed  all 
tendencies  and  created  a  market  condition  unknown  before  in 
the  history  of  the  world.  Along  with  the  movement  of  men 
and  war  material  to  the  eastern  seaboard,  there  arose  an  un- 
precedented European  demand  for  food  and  commodities  of 
all  kinds.      Price-fixing  by  Government,  and  prompt  payments 


358  RAILROADS  AND  BUSINESS  PROSPERITY 

through  the  United  States  Treasury,  made  European  markets 
seem  the  most  desirable  of  all  things  to  Western  producers. 
It  has  not  been  easy  to  accept  the  fact  that  this  war-time  phase 
was  wholly  abnormal,  that  it  will  never  return,  and  that  pros- 
perity must  be  found  at  home  or  nowhere. 

One  of  the  greatest  benefits  that  could  come  to  our  trans- 
portation interests  themselves  would  lie  in  the  purchase  of 
railway  securities  by  Western  and  Southern  investors,  in  order 
that  the  definite  and  conscious  control  of  their  own  major 
agencies  of  travel  and  traffic  movement  might  become  localized. 
Our  program  this  afternoon  is  designed  to  bring  the  question  of 
freight  rates  and  their  relation  to  general  prosperity  before 
us  from  the  standpoint  of  several  practical  and  theoretical  stu- 
dents of  these  subjects,  who  are  recognized  as  authorities  in 
their  respective  fields. 


THE  TRANSPORTATION  COST  IN  A  BASIC 
INDUSTRY— STEEL  PRODUCTS 

CHARLES  R.  HOOK 

Vice-President  and  General  Manager,  American  Rolling  Mill 
Company,  Middletown,  O. 

IN  talking  on  the  subject  "  Transportation   Costs  in   Steel 
Products ",    I    do   not  presume  to  speak   for  the   Steel 
Industry.      However,  the  figures  which  I  shall  present, 
although  applicable  to  plants  making  high-finished  sheet  steel, 
are,   I  believe,  indicative  of  what  is  true  with   respect  to  all 
other  steel  products. 

In  arriving  at  the  quantity  of  iron  ore,  coke  and  limestone 
used  in  the  production  of  one  ton  of  pig  iron  we  have  used  as 
a  basis  the  amounts  shown  by  the  Southern  Ohio  pig-iron 
manufacturers  in  the  ore  case  before  the  Interstate  Commerce 
Commission. 

To  make  one  ton  of  pig  iron,  the  following  quantities  of  raw 
material  are  required : 

Iron  ore 2  gross  tons 

Coke 1.10  net  tons 

Limestone 50  net  tons 

The  quantity  of  pig  iron  used  in  the  production  of  one  net 
ton  of  finished  sheets  is  taken  from  our  own  detailed  cost  sheets. 

If  you  will  refer  to  the  chart  you  will  observe  that  we  have 
presented  figures  showing  the  accumulated  freight  in  the  five 
principal  raw  materials  in  a  net  ton  of  finished  steel  sheets 
delivered  at  St.  Louis.  The  city  of  St.  Louis  is  used  only  be- 
cause it  is  a  natural  market  for  a  plant  in  our  locality. 

This  freight  today  is  $24.07,  in  1914  it  was  $11.84.  showing 
an  increase  of  $12.23  today  over  the  period  at  the  beginning 
of  the  World  War. 

If  we  deduct  the  freight  from  Middletown  to  St.  Louis, 
which  is  $6.80,  we  have  $17,271  as  the  amount  of  accumulated 
freight  in  these  items  at  Middletown. 

Sheets  which  are  being  delivered  on  orders  taken  prior  to 

339 


360 


RAILROADS  AND  BUSINESS  PROSPERITY 


this  month  were  sold  at  $60.00  per  net  ton ;  in  other  words,  this 
item  of  $17,271,  representing  the  accumulative  freight  in  only 
the  six  items  enumerated,  is  equal  to  28.8%  of  the  sales  price. 


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By  reference  to  page  24  of  the  Twentieth  Annual  Report  of 
the  United  States  Steel  Corporation,  just  issued,  we  find  this 
statement : 


TRANSPORTATION  COST  IN  A  BASIC  INDUSTRY  361 

A  number  of  elements  in  the  cost  of  producing  steel  show  little  if 
any  recession  from  war-time  figures,  notably  that  of  railroad  trans- 
portation, which  on  basis  of  existing  rate  conditions  averages  in  the 
case  of  the  subsidiary  companies  upwards  of  forty  per  cent  of  the 
total  cost  of  producing  steel. 

If  we  were  to  add  to  the  figures  we  have  shown  on  the  chart 
the  freight  on  all  the  other  materials  and  supplies  used  to 
produce  a  ton  of  sheet  steel,  you  can  readily  see  that  the  state- 
ment just  quoted  is  certainly  conservative  as  to  the  facts. 

In  announcing  new  and  lower  prices  for  steel  products,  going 
into  effect  on  July  5,  1921,  President  Grace,  of  Bethlehem 
Steel,  said : 

The  increase  in  freight  rates  has  been  the  largest  factor  in  increas- 
ing the  cost  of  manufacturing  steel  products  because  the  making  of  a 
ton  of  finished  steel  involves  the  transportation  of  more  than  five 
tons  of  raw  materials.  The  cost  factors  next  in  importance  are 
materials  and  labor. 

Taking  as  an  example  the  price  for  structural  shapes,  under  the 
new  schedule  of  prices,  2  cents  a  pound  or  $44.80  a  gross  ton,  the 
comparison  with  pre-war  prices,  reflecting  concretely  the  three  more 
important  cost  factors,  is  as  follows: 

The  increase  over  pre-war  cost  in  transportation  on  ore,  coal,  lime- 
stone, scrap  and  miscellaneous  supplies  amounts  to  $7.85  per  ton  of 
finished  steel. 

The  accumulated  freight  in  sheet  bars  would  I  believe  com- 
pare very  favorably  with  the  freight  in  structural  shapes,  yet 
sheet  bars  represent  only  the  beginning  of  operations  in  the 
production  of  finished  sheets,  so  by  a  little  use  of  the  imagina- 
tion you  can  readily  see  what  the  total  transportation  cost  in  a 
ton  of  sheet  steel  would  be,  if  all  the  materials  used  in  all  the 
operations  were  included  in  our  figures. 

It  may  interest  you  to  know  for  instance,  that  in  1920  we 
used : 

5555  Net  tons  spelter 
11335   Net  tons  sulphuric  acid 
26173  Net  tons  fire  brick  of  all  kinds. 

As  an  illustration  of  the  conditions  existing  in  1914  as  com- 
pared with  today  I  should  like  to  present  the  facts  with  refer- 
ence to  our  coal  supply. 

In  1914  the  average  price  of  all  the  coal  we  bought  was  93c 
per  ton  at  the  mine;  the  freight  was  $1.15,  making  a  total  cost 
of  $2.08  per  ton  f.  o.  b.  Middletown. 


362  RAILROADS  AND  BUSINESS  PROSPERITY 

The  freight  alone  today  is  $2.24,  or  16c  more  than  the  freight 
plus  the  cost  of  the  coal  in  1914. 

It  is  our  opinion  that  transportation  costs  must  be  liquidated 
to  somewhere  near  the  same  percentage  above  the  base  of  1914 
as  is  true  with  respect  to  steel  prices.  To  secure  liquidation 
of  transportation  charges,  comparable  with  that  which  has 
already  taken  place  in  the  steel  industry,  will  require  a  reduc- 
tion of  approximately  28*/2%  in  present  rates. 

I  think  I  am  safe  in  saying  that  the  steel  industry  as  a  whole 
wants  not  higher  prices  but  lower  costs  in  order  that  its  surplus 
production  can  be  sold  in  the  markets  of  the  world  in  com- 
petition with  our  fellow-manufacturers  across  the  water. 

I  am  not  unmindful  of  the  part  railroad  wages  are  playing 
in  the  cost  of  transportation  and  I  submit  to  you  that  it  is  not 
reasonable  to  ask  the  steel  worker,  who  is  receiving  a  wage 
fifty  per  cent  above  base,  to  buy  transportation  cost  in  every- 
thing he  wears  and  eats  when  that  cost  is  so  largely  affected 
by  railroad  wages  one  hundred  per  cent  above  base. 

Until  the  restoration  of  approximately  the  same  relation- 
ship which  existed  between  transportation,  fuel,  the  various 
basic  commodities  and  wages  during  the  pre-war  period  is 
effected,  a  normal  exchange  of  commodities  cannot  take  place 
and  any  attempt  to  maintain  one  of  the  factors  of  cost  at  a 
high  level  in  the  face  of  radical  declines  in  the  other  factors, 
is  contrary  to  economic  law  and  its  depressing  effect  is 
cumulative. 


HOW  THE  RAILROADS  MAY  RENDER  MAXIMUM 

SERVICE 

WILLIAM  J.  CUNNINGHAM 
Professor  of  Transportation,  Harvard  University 

IN  this  attempt  to  suggest  a  partial  answer  to  the  question 
assigned  to  me  for  discussion,  I  have  adopted  the  view- 
point of  the  near  future,  assuming  that  the  much-desired 
business  revival  is  not  far  distant.  Under  present  conditions 
of  subnormal  traffic  there  is  no  serious  question  concerning  the 
ability  of  the  railroads  to  meet  the  immediate  transportation 
needs,  although  the  standard  of  service  as  a  whole  is  lower  than 
that  which  should  obtain  in  normal  times  and  the  scale  of 
freight  rates,  dislocated  as  it  is  by  two  substantial  war-time 
horizontal  increases,  is  inequitable  in  many  respects  and  de- 
mands early  revision.  We  are,  however,  not  so  much  con- 
cerned with  the  immediate  present  as  with  the  near  future  when 
the  transportation  demands  will  be  much  greater  and  when  the 
capacity  of  the  railroads  will  perhaps  be  overtaxed. 

It  is  hardly  necessary  here  to  dwell  upon  the  fact  that  rail- 
road development  has  been  virtually  at  a  standstill  since  the 
beginning  of  the  World  War.  The  normal  rate  of  enlarge- 
ment and  improvement  in  facilities  and  equipment  had  been 
seriously  retarded  prior  to  the  war  when  the  steady  decline  in 
the  rate  of  return  on  investment  prevented  the  usual  income 
appropriations  for  betterments  and  increased  the  difficulties 
connected  with  raising  new  capital  on  reasonable  terms.  It 
will  be  recalled  that  the  peak-load  of  receiverships  came  in 

1915  when  about  one-sixth  of  the  entire  railroad  mileage  of 
the  country  was  in  the  hands  of  the  courts.  The  additional 
operating  revenues  from  the  large  volume  of  war  traffic  in 

1916  averted  the  threatened  general  financial  collapse,  and 
the  government  rentals  and  guarantees  from  January  1,  1918, 
to  September  1,  1920,  enabled  the  railroad  companies  to 
maintain  solvency.  Yet,  while  general  bankruptcy  was 
avoided,  the  program  of  extension,  enlargement  and  improve- 
ment was  necessarily  limited  to  emergency  needs,  and  when 

363 


364  RAILROADS  AND  BUSINESS  PROSPERITY 

the  railroads  were  again  entirely  on  their  own  resources  from 
September  1,  1920,  the  arrearage  in  deferred  but  necessary 
investments  in  betterments  was  substantial.  Little  could  be 
done  during  the  last  half  of  1920,  when  the  volume  of  traffic 
exceeded  all  previous  records,  and  such  plans  as  were  then 
made  for  execution  in  1921  were  necessarily  abandoned  in 
greater  part -in  1921  because  of  the  acute  business  depression 
and  the  serious  losses  in  revenues.  Notwithstanding  the  sub- 
stantial rate  increases  of  1920  the  net  railway  operating  in- 
come of  1921  was  but  little  more  than  one-half  of  the  statutory 
rate  of  six  per  cent  contemplated  by  the  Transportation  Act 
as  a  reasonable  return  on  property  value. 

Various  estimates  have  been  made  as  to  the  sum  necessary 
to  make  up  the  deferred  improvements.  It  is  probably  close 
to  the  mark  to  set  the  amount  at  $1,000,000,000  per  year  for  five 
or  six  years.  To  this  should  be  added  a  large  sum  for  deferred 
maintenance  chargeable  entirely  to  operating  expenses.  This 
need  for  large  capital  expenditures  was  referred  to  by  Mr. 
Willard  this  noon  who  stated  that  it  would  be  approximately 
half  a  billion  dollars  a  year.  Mr.  Hines  thought  it  might  be  as 
much  as  one  billion.  It  may  be  recalled  that  ten  or  twelve  years 
ago,  the  late  James  J.  Hill  stated  that  the  railroads  needed  a 
billion  dollars  a  year  for  five  years  for  terminal  enlargements. 
My  own  view  is  that  the  larger  figure  is  that  which  is  justifiable, 
and  that  the  railroads  will  need  during  the  next  four  or  five 
years  to  spend  one  billion  dollars  per  year  for  additions  and 
betterments.  One  billion  dollars  a  year,  related  to  twenty 
billion  dollars  property  investment,  is  an  increase  of  only  five 
per  cent  a  year,  so  that  while  the  sum  itself  sounds  large,  it  is 
not  so  large  relatively. 

Considering  the  fact  that  the  normal  growth  in  ton-miles 
over  a  long  series  of  years  has  Seen  an  increase  of  one  hundred 
per  cent  every  twelve  years,  and  that  passenger  miles  normally 
double  in  approximately  fifteen  years,  it  is  plainly  evident  that 
a  consistent  and  continuous  program  for  increasing  traffic  capa- 
city is  imperative.  Having  in  mind  also  the  further  fact  that 
relatively  little  has  been  done  to  increase  traffic  capacity  during 
the  past  decade,  the  seriousness  of  the  situation  is  obvious.  It 
is  probably  true  that  the  traffic  of  the  fall  of  1920  was  the 
greatest  load  that  the  existing  facilities  could  stand.      Since 


RAILROADS  RENDER  MAXIMUM  SERVICE  365 

then  there  have  been  practically  no  increases  in  capacity.  In- 
deed the  situation  with  respect  to  maintenance,  particularly  as 
to  freight  and  passenger  car  equipment,  may  be  less  favorable. 

If  these  premises  are  correct,  and  I  believe  that  they  are, 
the  railroads  will  have  difficulty  in  rendering  satisfactory 
service  when  the  business  revival  brings  with  it  a  volume  of 
traffic  as  great  or  greater  than  that  of  two  years  ago.  There 
is  imperative  need,  therefore,  for  the  expenditure  of  large  sums 
for  additions  and  betterments.  The  railroads  cannot  furnish 
the  maximum  of  service  without  such  expenditures.  The 
problem  then  is  largely  one  of  finance. 

With  the  passage  of  the  Transportation  Act  and  its  con- 
structive rule  of  rate-making,  as  well  as  its  recognition  of  the 
principle  that  carriers  are  entitled  to  a  fair  rate  of  return  on 
property  value,  and  with  the  rate  increase  authorized  in  1920 
by  the  Interstate  Commerce  Commission  for  the  purpose  of 
producing  a  net  return  of  six  per  cent,  it  was  hoped  that  sub- 
stantial progress  had  been  made  toward  the  solution  of  the 
financial  problem.  All  calculations,  however,  were  upset  by 
the  business  depression.  Yet  it  is  not  proper  to  interpret  the 
disappointing  results  of  1921  as  an  indication  that  the  Trans- 
portation Act  has  failed.  Its  real  test  must  await  a  return  to 
normal  business  conditions.  My  own  opinion  is  that  its  in- 
herent soundness  will  then  be  demonstrated. 

I  shall  digress,  if  I  may,  to  show  how  the  law  of  diminish- 
ing returns  can  easily  explain  why  the  railroads  under  the  high 
freight  rates  of  1920  were  able  to  earn  only  one-half  of  the 
rate  of  return  contemplated  by  the  Transportation  Act.  It  will 
be  recalled  that  the  increases  authorized  by  the  Interstate 
Commerce  Commission  were  based  largely  upon  estimates  made 
by  the  railroads,  checked  and  accepted  by  the  Commission.  In 
arriving  at  those  estimates,  the  amount  of  the  increase  was 
determined  by  going  to  the  bottom  of  the  income  account,  and 
working  upward,  that  is,  determining  what  six  per  cent  on  the 
property  value  would  require,  estimating  taxes  and  other  items, 
estimating  operating  expenses,  seeing  what  the  gross  operating 
revenues  should  be,  then  finding  out  how  much  freight  and 
passenger  rates  should  be  increased  to  bring  that  gross  revenue. 
The  Interstate  Commerce  Commission  then  attempted  to  set 
rates  so  as  to  bring  that  estimated  amount  of  operating  revenue 


366  RAILROADS  AND  BUSINESS  PROSPERITY 

which  would  yield  the  six  per  cent  contemplated  by  the  Act. 
It  so  happened,  however,  that  the  volume  of  traffic  upon  which 
the  calculation  was  based  was  overestimated  and  some  of  the 
expenses  were  underestimated. 

Let  us  assume  that  that  gross  revenue  is  one  hundred  and 
that  the  operating  expenses  are  seventy,  leaving  the  net  oper- 
ating revenue  as  thirty.  Taxes  and  charges  might  be  as- 
sumed as  five  and  fifteen,  respectively,  leaving  twenty  of  taxes 
and  charges  to  come  out  of  the  thirty  net  operating  revenue. 
That  would  leave  ten  as  a  surplus  for  the  payment  of  dividends 
or  appropriations. 

Instead  of  getting  one  hundred  units  of  revenue,  the  rail- 
roads got  less  than  eighty.  For  easy  figuring,  let  us  assume 
that  they  got  eighty.  That  would  be  a  twenty-per-cent  de- 
crease. Expenses  could  not  be  reduced  twenty  per  cent  with 
the  loss  of  traffic,  because,  roughly  speaking,  only  one-half  of 
the  expenses  will  fluctuate  with  fluctuations  in  traffic  in  that 
degree.  If  we  take  that  as  a  basis,  one-half  of  the  twenty,, 
or  ten  per  cent,  would  affect  the  expenses,  bringing  the  expenses 
from  seventy  to  sixty-three.  The  sixty-three  expenses,  then, 
would  be  taken  from  eighty  operating  revenues,  leaving  seven- 
teen net,  instead  of  thirty.  From  that  seventeen,  it  would  be 
necessary  to  deduct  twenty  for  taxes  and  charges,  leaving  a 
deficit  of  three  units  instead  of  a  surplus  of  ten.  That  is  a  very 
simple  arithmetical  demonstration  of  the  profound  effect  of  a 
loss  in  traffic  because  expenses  cannot  be  trimmed  to  meet  the 
loss  in  revenue  to  the  same  degree  in  which  that  loss  in  revenue 
occurred,  and  besides,  taxes  and  other  expenses  are  constant. 

That  will  explain,  in  greater  part,  the  disappointing  results 
of  1921.  It  is  not  an  indication  of  failure  of  the  Trans- 
portation Act.      It  is  merely  the  working  of  economic  laws. 

In  the  meantime  how  are  the  railroads  to  render  maximum 
service?     It  seems  to  me  that  the  answer  is: 

(1)  By  improvement  in  management; 

(2)  By  better  relations  with  labor;  and 

(3)  By  patience  and  tolerance  on  the  part  of  the  public. 

Without  intelligent  management,  loyal  service  from  em- 
ployees, and  the  support  of  public  confidence,  satisfactory  and 
economical  service  is  impossible.      In  whatever  degree  an  im- 


RAILROADS  RENDER  MAXIMUM  SERVICE  367 

provement  is  brought  about  in  any  one  or  in  all  of  the  three 
fields,  in  that  degree  will  progress  be  made  toward  the  attain- 
ment of  the  objective  named  in  the  subject  of  this  paper. 

Public  regulation  of  railroads  may  have  been  carried  to 
extremes  and  in  certain  particulars  such  regulation  has  worked 
against  the  best  interests  of  both  the  public  and  the  railroad 
owners,  yet  such  criticism  as  may  fairly  be  directed  against 
regulation  applies  to  policies  followed  prior  to  1920.  The 
Transportation  Act  of  that  year  marked  a  new  era  in  which 
the  regulating  authorities  are  charged  with  new  responsibility 
for  the  powers  which  they  may  wield.  Prior  to  1920  the  spirit 
of  regulation  was  mainly  corrective  and  punitive.  The  new 
law,  while  continuing  the  powers  of  correction  and  punishment, 
also  recognizes  the  fact  that  the  prosperity  of  railroads  is  es- 
sential to  satisfactory  public  service  and  it  directs  the  regulating 
bodies  to  exercise  their  authority  so  that  consideration  shall  be 
given,  among  other  things,  to  the  transportation  needs  of  the 
country  and  the  necessity  of  enlarging  transportation  facilities 
"  in  order  to  provide  the  people  of  the  United  States  with  ade- 
quate transportation." 

In  return  for  this  public  recognition  of  responsibility  and 
partnership  in  adequate  net  earning  power,  railroad  managers 
should  whole-heartedly  accept  all  of  the  obligations  which  the 
Act  imposes  upon  them.  In  the  first  place  there  is  the  obliga- 
tion to  operate  the  properties  honestly,  efficiently  and  economi- 
cally. In  the  second  place  there  is  the  obligation  to  recognize 
the  fact  that  the  principle  of  railroad  consolidation  is  a  vital 
part  of  the  new  rate-making  rule.  A  selfish  attitude  on  the 
part  of  individual  roads  in  opposing  progress  toward  the  eli- 
mination of  the  troublesome  factor  of  the  weak  road,  should  not 
be  allowed  to  wreck  the  most  important  feature  of  the  new  law. 
I  am  sorry  here  to  disagree  somewhat  with  Mr.  Willard,  who, 
while  believing  in  the  principle  of  consolidation,  regards  it  as 
not  vitally  important.  It  seems  to  me  that  it  is  a  vital  part 
of  the  successful  working  of  the  rate-making  rule,  inasmuch 
as  it  is  only  by  consolidation  that  the  so-called  weak  roads  can 
be  strengthened,  by  being  absorbed  by  the  stronger  roads. 
In  the  third  place,  there  should  be  a  more  receptive  attitude 
toward  really  constructive  measures  which  look  toward  uni- 
fication  of  facilities  and  pooling  of  freight  equipment.      All 


368  RAILROADS  AND  BUSINESS  PROSPERITY 

such  proposals  have  their  defects,  some  of  them  serious,  but 
when  a  plan  such  as  that  of  common  ownership  and  control  of 
freight  cars  is  so  obviously  advantageous  in  principle,  an  effort 
should  be  made  to  make  it  workable  rather  than  to  block 
progress  by  condemning  the  whole  because  of  a  defect  in  a  part. 

The  railroads  as  a  whole  quite  properly  protest  against  the 
efforts  of  those  who  support  the  Capper  Bill  which  would  eli- 
minate the  rate-making  provision  of  the  Transportation  Act, 
yet  a  few  of  the  railroads  will  just  as  surely  destroy  the  effec- 
tiveness of  the  law  by  attacking  the  principle  of  recapture  of 
excess  earnings,  or  by  appealing  to  the  courts  to  overthrow 
the  decision  of  the  Interstate  Commerce  Commission  in  a  recent 
important  case  affecting  the  division  of  revenues  on  joint  traffic. 
The  best  interests  of  the  railroads  as  well  as  those  of  the  public 
will  be  served  by  a  whole-hearted  acceptance  of  every  part 
of  the  Transportation  Act  to  the  end  that  it  may  have  a  fair 
trial  under  normal  conditions. 

Finally,  the  railroads  as  a  whole  should  agree  upon  and  make 
effective  a  fair  and  enlightened  policy  toward  labor,  recog- 
nizing the  joint  partnership  in  an  ungrudging  spirit  and  with- 
out antagonism  against  unions  as  such.  The  Transportation 
Act  provides  the  necessary  machinery  for  the  restoration  of 
amicable  relations.  The  responsibility  for  the  failure  to  get 
together  on  important  principles  cannot  be  charged  entirely 
to  management  but  it  must  assume  a  share.  The  fear  on  the 
part  of  the  unions  that  some  railroads  are  attempting  to  use 
the  present  opportunity  to  disrupt  their  organizations  has  a 
very  disturbing  influence.  Economical  operation  and  maxi- 
mum transportation  capacity  are  impossible  while  labor  rela- 
tions are  strained  beyond  the  legitimate  and  natural  degree 
of  difference  in  the  respective  viewpoints  of  employer  and 
employed. 

But  the  remedy  is  not  wholly  in  the  hands  of  management. 
The  public  has  a  right  to  demand  that  employees  shall  recog- 
nize the  relation  between  loyal  and  efficient  service  and  econom- 
ical and  satisfactory  transportation.  Misled  by  their  leaders, 
an  increasingly  large  proportion  of  employees  believe  that 
railroad  management  as  a  whole  is  corrupt,  and  their  resist- 
ance to  the  inevitable  deflation  in  war-time  wage  rates  and 
restrictive  rules  is  carried  to  an  extreme  which,  while  aimed 


RAILROADS  RENDER  MAXIMUM  SERVICE  369 

at  management,  disregards  public  interests  in  the  restoration 
of  normal  conditions.  Just  as  railroad  managers  as  a  whole 
must  recognize  their  obligations  as  the  operating  heads  of 
public  utilities,  so  must  the  labor  leaders  and  the  union  mem- 
bership be  brought  to  a  realization  of  the  fact  that  they  too 
are  amenable  to  the  bar  of  public  opinion.  The  obligation  of 
the  railroad  managers  to  pay  fair  wages  is  no  greater  than  that 
of  the  employees  to  work  efficiently. 

Finally  we  come  to>  the  obligations  of  the  general  public. 
When  Congress,  in  1919,  considered  the  many  plans  for  the 
solution  of  the  railroad  problem,  it  responded  to  an  over- 
whelming public  sentiment  by  rejecting  all  proposals  looking 
toward  government  ownership  or  operation  in  any  form.  Pub- 
lic opinion  was  unmistakably  in  favor  of  a  return  to  the  initia- 
tive and  competition  of  private  ownership  and  management. 
The  passage  of  the  Transportation  Act  appeared  to  wipe  the 
slate  clean  of  public  resentment  and  antagonism  because  of  past 
abuses  and  mismanagement,  and  the  railroads  were  returned  to 
their  owners  with  an  encouraging  degree  of  public  confidence. 

Principally  because  of  the  disturbing  effects  of  the  business 
depression  and  the  burden  of  war-inflated  freight  rates,  a  large 
part  of  the  public  confidence  in  railroads  has  changed  into  an 
attitude  of  criticism  and  distrust.  Much  of  the  criticism  is 
the  result  of  misunderstanding.  It  is  commonly  believed  that 
the  railroads  are  working  under  a  guarantee  from  the  govern- 
ment and  that  they  are  not  accepting  their  fair  share  of  the 
pains  of  post-war  deflation.  The  effect  of  freight  rates  upon 
the  cost  of  living  and  upon  the  marketing  of  commodities  has 
been  unfairly  magnified,  and  the  atmosphere  is  befogged  by 
professional  propagandists  with  a  mixture  of  sophistry,  half- 
truth  and  misstatement. 

If  we  are  to  find  a  way  out  of  the  dilemma  short  of  gov- 
ernment ownership  it  can  only  be  by  the  exercise  of  patience 
and  tolerance  on  the  part  of  the  public.  They  must  give  the 
railroads  time  to  adjust  their  costs  to'  changed  conditions  and 
to  put  their  house  in  order  for  the  hoped-for  better  times  and 
bigger  traffic.  The  public  must  exercise  moderation  and  tem- 
perance in  their  demands  for  rate  reductions.  Just  now  each 
group  of  shippers  is  insisting  that  the  rates  in  which  it  is 
interested  must  come  down  at  once  without  regard  to  the  effect 


370 


RAILROADS  AND  BUSINESS  PROSPERITY 


upon  railroad  net  income  and  service.  Notwithstanding  the 
fact  that  the  present  rate  scale  is  yielding  only  slightly  more 
than  three  per  cent  on  property  value,  certain  interests  are 
intent  upon  cutting  the  heart  out  of  the  Transportation  Act 
by  repealing  its  rate-making  clause,  and  upsetting  the  equili- 
brium by  curtailing  the  power  of  the  Interstate  Commerce 
Commission  over  state  rates. 

Unless  the  public  will  refrain  from  encouraging  Congress 
to  tinker  with  the  existing  laws,  and  from  bringing  political 
pressure  to  bear  upon  the  Interstate  Commerce  Commission  to 
make  wholesale  downward  rate  adjustments  while  the  rail- 
roads are  barely  able  to  pay  taxes  and  charges,  there  can  be 
little  progress  made  in  putting  the  transportation  machine  in 
order  for  the  heavy  traffic  load  which  will  probably  soon  be 
in  sight. 

Patience  and  tolerance,  and  a  reasonable  degree  of  con- 
fidence in  the  integrity  of  railroad  management,  will  serve 
the  real  and  long-time  interests  of  the  public  much  better  than 
impatience,  intolerance  and  distrust.  Adequate  service  and  a 
factor  of  safety  in  traffic-carrying  capacity  are  more  important 
than  low  rates.  An  insistence  upon  rates  which  are  unre- 
munerative  will  work  against  the  rehabilitation  of  the  railroad 
properties,  prevent  the  making-up  of  deferred  maintenance  and 
effectually  block  the  flow  of  income  and  new  capital  into 
imperatively  needed  and  long-delayed  improvements  and 
enlargements. 


WHAT   RAILROADS   ARE   DOING   TO    INCREASE 
ECONOMY  AND  EFFICIENCY  OF  OPERATION 

R.  H.  AISHTON 

President,  American  Railway  Association,  Chicago;  Former  Regional 
Director,  Northwestern  Region,  U.  S.  Railroad  Administration 

I    HAVE  been  assigned  twenty  minutes  in  which  to   deal 
with  a  rather  large  subject.      How  large  it  is,  I  doubt 
whether  many  people  realize.     For  example,  in  the  year 
1921  the  Class  1  railroads  performed  the  following  service. 

They  moved  3°6rV  billion  tons  revenue  freight  one  mile 

ZlYs  billion  passengers  one  mile 
To  do  this 

They  created  1-fV  billion  train  miles 

They  earned  SlA  billion  dollars 

They  paid  operating 

expense  ^l/2  billion  dollars 

There  was  paid 

in  wages  2&   billion   dollars,  the  decrease   over  pre- 

vious year  being  due  to  depressed  business, 
deferred  maintenance  and  consequent  large 
reduction  in  number  of  employees. 

That  is  all  I  shall  say  regarding  billions  or  millions.  It  is 
hard  for  me  to  comprehend  what  a  million  is,  to  say  nothing 
of  a  billion.  Let  us  get  down  to  something  we  can  all  under- 
stand without  undue  mental  strain.  I  have  been  allotted  twenty 
minutes.  I  started  talking  at  5  :00,  I  will  finish  and  sit  down 
at  5  :20,  and  during  that  twenty  minutes  this  will  have  hap- 
pened on  the  railroads.  During  the  twenty  minutes  that  I 
am  talking  the  energy  developed  by  the  railroads  is  equivalent 
to  moving  a  train  consisting  of  a  locomotive  with  ten  freight 
cars  carrying  311  tons  of  revenue-paying  freight,  with  two  more 
freight  cars  containing  38  tons  of  Company  freight  that  doesn't 
produce  revenue,  with  two  passenger  cars  containing  38  paying 
passengers  together  with  the  employees  necessary  to  operate 
the  train,  with  the  necessary  postal,  baggage  and  express  car, 
and  a  little  old  red  caboose,  a  total  of  17  cars,  a  distance  of 
37,500  miles,  or  once  and  one-half  times  around  the  earth  at 
its  greatest  circumference.  What  do  they  get  for  performing 
this  service?     The  year  1914  is  taken  for  comparison  because 

371 


372  RAILROADS  AND  BUSINESS  PROSPERITY 

it  was  a  year  of  depression  and  because  it  marked  the  start  of 
the  European  war,  the  beginning  of  all  our  troubles : 

In  1914  every  20  minutes  the  gross  earnings  were  $115,347 

In  1921  every  20  minutes  the  gross  earnings  were 209,874 

Increase — 82% 

In  1914  every  20  minutes  the  operating  expenses  were...     $83,844 
In  1921  every  20  minutes  the  operating  expenses  were...      173,652 

Increase — 107% 

In  1914  the  pay  roll  for  20  minutes  $50,888 

In  1921  the  pay  roll  for  20  minutes  106,379 

Increase — 107% 

The  above  figures  indicate  what  the  matter  is.  In  addition, 
the  following  facts  should  be  considered. 

In  1914  every  20  minutes  there  was  paid  in  taxes  $5^59 

In  1921  every  20  minutes  there  was  paid  in  taxes   10,526 

Increase — 104% 

In  1914  every  20  minutes  the  net  Railway  operating  in- 
come, which  is  the  amount  left  after  payment  of  ex- 
penses and  taxes,  was   $25,153 

In  1920  it  practically  disappeared,  being  only 822 

In  1921,  however,  with  an  increase  of  3,091  millions  in 
investment  over  1914,  the  net  operating  income  every 
20  minutes  was   22,755 

In  other  words,  whereas  the  book  value  increased  18% 
between  1914  and  1921,  the  net  railway  operating  in- 
come earned  on  the  investment  thus  increased  actually 
decreased  9A%. 

What  are  the  Railroads  doing  to  bring  about  economy  and 
efficiency  ? 

In  1921,  although  the  times  were  depressed,  as  was  the  case 
in  1914:— 

They  handled  7.7%  more  revenue  ton-miles  than  they  did 
in  1914. 

They  handled  8.0%  more  passenger-miles. 

They  did  it,  however,  with  10.6%  less  train-miles,  and  the 
train-mile  is  what  creates  expense.  There  must  have  been 
economy  and  efficiency  manifested  there,  surely. 

In  1920,  with  a  large  business,  as  compared  with  1914,  with 
a  light  business  : — 

There  was  an  increase  of  44%  in  revenue  freight-ton-miles, 
and  about  36%  in  revenue  passenger-miles,  and  yet  this  was 
accomplished  with  the  same  train-miles,  practically,  as  in  1914. 


ECONOMY  AND  EFFICIENCY  OF  OPERATION  373 

As  a  matter  of  fact,  it  was  300  miles  less  every  twenty  minutes 
than  in  the  1914  period.     Truly  a  notable  record. 

There  isn't  a  railroad  but  what  has  been  and  is  making 
the  strongest  individual  efforts,  through  its  own  organization 
of  experts,  to  develop  new  methods  of  efficiency  and  economy. 
I  doubt  if  there  is  any  industry  in  the  country  that  has  any 
more  complete  check  on  the  minutest  details  of  its  operations, 
or  that  has  competitive  initiative  developed  to  a  higher  degree, 
than  the  transportation  companies. 

The  field  for  economy  in  the  future  lies  largely,  in  my 
opinion,  in  two  main  directions : 

(i)   Heavier  car  loading. 

One  ton  more  per  car  load  is  equivalent  to  adding  80,000 
cars  to  the  supply. 

(2)   More  mileage  per  car  per  day. 

One  mile  additional  is  equivalent  to  adding  100,000  cars 
to  the  supply. 

These  two  things  the  railroads  and  shippers  are  vitally  inter- 
ested in  and  they  are  working  cooperatively  towards  the  ulti- 
mate goal.  Besides  this  there  are,  of  course,  the  large  intensive 
developments  requiring  large  capital  expenditures  that  will 
produce  economies.  When  the  time  arrives  when  such  ex- 
penditures can  with  safety  be  made  with  a  hope  of  reasonable 
return,  as  great  progress  will  be  possible  in  the  future  as  has 
taken  place  in  the  past. 

The  time  limit  has  now  expired.  It  is  5  :20.  Our  train  has 
completed  its  twenty-minute  journey  once  and  one-half  times 
around  the  world;  but  while  this  talk  stops  the  train  must  still 
keep  going  day  and  night  through  storm  and  sunshine,  through 
business  depression  and  great  activity,  without  a  hitch  but  with 
constantly  increasing  speed  and  cargo,  if  this  nation  of  ours 
is  to  continue  to  expand. 


THE  TRANSPORTATION  FACTOR  IN  THE  PRICE 

OF  COAL 

J.  D.  A.  MORROW 
Vice-President,  National  Coal  Association,  Washington,  D.  C. 

SPEAKING  as  I  do  as  Vice-President  of  the  National 
Coal  Association,  which  is  an  organization  of  bitumin- 
ous coal  producers,  what  I  have  to  say  on  the  subject 
of  the  transportation  factor  in  the  price  of  coal  refers  particu- 
larly to  bituminous  coal  and  not  to  anthracite. 

When  the  ordinary  consumer  pays  his  coal  bill  he  thinks 
he  has  paid  for  coal.  As  a  matter  of  fact  what  he  has  chiefly 
bought  and  paid  for  is  transportation  service  from  the  coal 
seam  to  his  furnace  room.  The  discussion  of  this  factor  in 
the  cost  of  coal  usually  centers  about  railroad  transportation, 
but  in  order  that  you  may  appreciate  more  fully  the  part 
which  the  railroad  plays  in  the  whole  problem  of  transporta- 
tion of  coal,  I  want  to  speak  very  briefly  about  some  of  the 
transportation  problems  involved  in  volume  production  of  coal. 

Transportation  of  bituminous  coal  from  the  mine  to  the 
consumer  begins  at  the  face  of  the  coal  seam  underground, 
often  two  or  three  or  four  miles  from  the  tipple  where  the 
product  is  dumped  into  railway  cars.  Various  methods  are 
used  in  that  underground  transportation,  ranging  all  the  way 
from  primitive  haulage  by  mule  or  horse  in  very  small  mines 
to  splendid  motor  haulage  over  miniature  electric  railway  sys- 
tems in  the  larger  modern  mines.  If  the  mine  is  a  drift  mine, 
that  is  if  it  goes  directly  into  the  hillside,  the  trains  or  "  trips  " 
of  mine  wagons  are  hauled  out  and  dumped  directly  into  rail- 
way cars.  If  it  is  a  shaft  mine,  the  wagons  are  brought  to  the 
foot  of  the  shaft,  uncoupled,  lifted  to  the  surface,  and  then 
dumped  into  railroad  cars.  Sometimes  the  mine  wagons  are 
dumped  at  the  shaft  bottom  into  skips  which  bring  the  coal 
to  the  surface. 

The  cost  of  transporting  coal  underground  upon  the  mine 

haulage  varies,  of  course,  with  many  different  local  conditions, 

such  as  the  type  of  haulage  used,  the  grades  in  the  mines,  the 
374 


TRANSPORTATION  FACTOR  IN  THE  PRICE  OF  COAL        375 

length  of  haul,  the  extent  to  which  falls  of  the  roof  have  to 
be  cleaned  up,  the  extent  to  which  bottom  conditions  necessi- 
tate repairs  to  track  and  increase  the  track  maintenance  cost, 
and  similar  factors.  The  range  of  mine  haulage  cost  is  gener- 
ally between  20  cents  and  35  cents  per  ton,  on  the  basis  of 
present  wage  scales,  out  of  a  total  average  production  cost  for 
1921  of  $2.94  per  net  ton.  There  are  extremes,  of  course, 
above  and  below  those  figures,  but  they  represent  the  general 
range  of  transportation  costs  at  the  mine  at  present.  Approxi- 
mately 80%  of  this  haulage  cost  is  direct  labor  cost  in  the 
operation  of  the  mine  transportation  system.  The  other  20% 
is  made  up  of  cost  of  supplies,  repair  parts  and  power,  and  of 
depreciation  on  the  haulage  system. 

It    must   be    remembered    that   these    railway    systems    are 
equipped  with  expensive  electric  or  storage  batteries,  or  with 
compressed  air  locomotives,  and  that  many  of  the  mines  have 
a   large   number  of  cars   underground.      They   are   equipped 
with  heavy  steel   rails.     The  operators  have  the  problem  of 
maintenance  of  track  under  the  adverse  conditions  common  to 
coal  mines,  with  constant  falls  of  slate  and  rock  from  the  roof, 
with   other  difficulties  with   roof  and  bottom,   with  a   certain 
amount  of  corrosion  from  mine  water  and  so  on.     The  main- 
tenance of  way  underground  is  much  more  difficult  than  the 
maintenance  of  a  railway  system  on  top  of  the  ground.     All  of 
these  factors  enter  into  that  cost  of  underground  transporta- 
tion.     Moreover,  the  mine  transportation  system  is  not  used 
twenty-four  hours  in  the  day,  as  is  an  outdoor  railroad  system. 
The  second  element  in  the  transportation  cost  of  bituminous 
coal   is  the   railway   freight   rate.       Railway   freight   rates   on 
bituminous  coal  at  present  are  approximately  93%  higher  than 
in  1913.      They  range  from  90  cents  per  ton  on  short  hauls  to 
$7.25  per  ton  on  such  movements  as  that  from  the  mines  of 
Utah  and  Colorado  to  the  Pacific  Coast.    According  to  George 
M.  Shriver,  Vice-President  of  the  Baltimore  &  Ohio  Railroad, 
the    present    average    railroad    transportation    charge    on    all 
revenue  bituminous  coal  is  $2.27  per  ton.      Not  all  of  the  out- 
put of  bituminous  coal  bears  this  transportation  charge.      Of 
the  total  normal  production  approximately  11%  is  used  at  the 
mines  and  89%   is  shipped  away.     This  11%   is  made  up  as 
follows:  About  3.7%  is  sold  locally  to  consumers  in  the  vicinity 


S76  RAILROADS  AND  BUSINESS  PROSPERITY 

of  the  mines;  2%  is  consumed  by  the  mines  themselves  for 
power  and  fuel  purposes;  and  5.3%  is  made  into  coke  at  the 
mines.  The  89%  which  is  shipped  away  from  the  mines  moves 
as  follows:  2%  by  water,  chiefly  on  the  Monongahela, 
Kanawha,  Ohio  and  Mississippi  Rivers;  and  87%  by  rail. 
One-fifth  of  this  87%  is  non-revenue  railroad  fuel  coal.  This 
coal  is  used  on  the  lines  of  the  originating  carriers  and  while 
it  bears  a  transportation  cost,  no  charge  is  made  by  the  carrier 
for  the  movement  of  its  own  fuel  supply.  This  leaves  approxi- 
mately 69.5%  of  the  normal  output  of  bituminous  coal  as 
revenue  freight,  which  moves  at  an  average  transportation 
charge  of  $2.27  per  ton.  On  this  coal  the  total  railroad  freight 
charge  is  something  over  $780,000,000  annually  at  the  present 
freight  rates. 

It  is  of  interest  here  to  call  attention  to  the  further  fact 
that  this  69.5%  of  bituminous  coal  which  bears  a  definite  rail- 
road transportation  charge  is  made  up  of  9%  distributed 
through  retail  coal  dealers  to  household  and  small  industrial 
consumers  and  60.5%  consumed  by  carload  users  of  coal.  The 
latter  consumers,  such  as  railroads  upon  whose  lines  there  are 
no  coal  mines,  electric  light  and  power  plants,  street  railways, 
gas  works,  by-product  coke  plants,  manufacturing  establish- 
ments of  all  kinds,  exporters  of  coal  and  ship  bunkering  con- 
cerns, pay  the  freight  on  that  coal  themselves;  so  that  their 
delivered  price  is  made  up  of  the  f.  o.  b.  mine  price  plus  the 
railroad  freight  on  the  coal.  For  the  three  months  of  Janu- 
ary, February  and  March,  1922,  the  general  market  level  of 
bituminous  coal  prices  for  the  United  States  as  a  whole  aver- 
aged between  $2.05  and  $2.33  per  ton  for  run  of  mine  coal. 
By  run  of  mine  coal  I  mean  the  coal  just  as  it  comes  to  the 
surface,  without  any  further  cleaning  or  preparation  than  what 
it  has  received  from  the  miners  underground.  Bituminous 
coal  is  sold  not  only  as  run  of  mine  but  also  in  a  number  of 
different  sizes  ranging  from  fine  screenings  to  eight-inch 
lump.  Just  as  the  freight  rates  on  bituminous  coal  varied 
from  90c  per  ton  to  more  than  $7.00  per  ton  according  to  the 
haul,  so  also  the  open  market  prices  for  bituminous  coal  during 
the  winter  ranged  from  75  cents  per  ton  for  screenings  to  $5.00 
per  ton  for  the  highest  grade  of  especially  prepared  domestic 
lump  coal. 


TRANSPORTATION  FACTOR  IN  THE  PRICE  OF  COAL        377 

Before  passing  on  from  the  subject  of  railroad  transportation 
of  coal  I  desire  to  call  your  attention  to  another  significant 
fact.  Not  only  is  it  true,  as  I  have  already  pointed  out,  that 
the  freight  charge  on  coal  makes  up  over  one-half  of  the  total 
delivered  cost  of  coal,  but  it  is  also  true  that  the  freight  charge 
on  coal  constitutes  a  much  larger  percentage  of  the  total  deliv- 
ered cost  than  is  the  case  with  almost  any  other  commodity, 
and  also  that  the  increases  in  freight  rates  granted  during  and 
since  the  war  have  borne  with  special  hardship  upon  bitumin- 
ous coal.  These  facts  may  be  best  shown  by  a  few  typical 
illustrations  taken  from  actual  shipments  before  the  -begin- 
ning of  the  strike. 

Let  us  compare  coal  with  another  bulk  basic  commodity  like 
cement.  There  is  a  considerable  movement  of  cement  from 
Allentown,  Pennsylvania,  to  Fairmont,  West  Virginia.  Simi- 
larly bituminous  coal  moves  in  the  opposite  direction  from 
Fairmont,  West  Virginia,  to  Allentown,  Pennsylvania.  In 
1914  the  freight  rate  on  a  carload  of  cement  was  $75.00,  or 
22.1%  of  the  value  of  the  shipment.  The  freight  rate  on  a 
carload  of  coal  was  $87.75,  or  58.5%  of  the  value  of  the 
shipment.  See  now  how  the  increases  in  freight  rates  between 
1914  and  1922  affected  these  figures.  In  January,  1922,  the 
freight  rate  on  the  cement  had  been  advanced  to  $142.50,  and 
now  constituted  41.9%  of  the  value  of  the  cement.  Mean- 
while the  freight  rate  on  the  coal  had  been  increased  to  $160.65, 
or  107.1%  of  the  mine  cost  of  the  coal.  In  other  words,  while 
the  actual  increase  in  the  rate  on  coal  was  only  $5.40  more  than 
that  in  the  rate  on  cement,  that  increase  constituted  48.6%  of 
the  value  of  the  carload  of  coal  and  only  19.9%  of  the  value 
of  the  carload  of  cement. 

It  will  be  readily  seen  that  if  such  a  relation  existed  in  the 
case  of  cheap  bulky  commodities  it  would  become  still  more 
striking  in  the  case  of  more  valuable  articles.  Without  un- 
necessary details  let  me  quote  two  other  illustrations.  Cotton 
is  shipped  from  Opelika,  Alabama,  to  Birmingham,  Alabama, 
and  there  is  a  reverse  movement  of  bituminous  coal.  In  1914 
the  freight  rate  on  cotton  was  1.4%  of  the  value  of  the  com- 
modity, while  that  on  coal  was  50%.  As  a  result  of  rate  in- 
creases the  freight  rate  on  cotton  in  January,  1922  was  3% 
of  the  value  of  the  shipment,  while  that  on  bituminous  coal 


378  RAILROADS  AND  BUSINESS  PROSPERITY 

was  95.2%  of  that  value.  In  other  words  the  increase 
amounted  to  1.6%  of  the  value  of  the  cotton,  and  45.2%  of  the 
value  of  the  coal. 

On  the  shipment  of  automobiles  from  Detroit  to  Athens, 
Ohio,  and  of  bituminous  coal  from  Athens,  Ohio,  to  Detroit, 
we  have  the  following  corresponding  figures.  In  1914  for 
automobiles  the  freight  rate  was  1.1%  of  the  value  of  the  ship- 
ment, while  on  the  coal  the  rate  was  63.9%  of  that  value;  in 
January,  1922,  for  automobiles  the  percentage  was  2.4%  and 
for  bituminous  coal  137.2%,  showing  an  increase  in  the  case 
of  automobiles  amounting  to  1.3%  of  the  value  of  the  ship- 
ment, and  in  the  case  of  bituminous  coal  to  no  less  than  73.3% 
of  the  value.  These  illustrations  are  sufficient  to  give  force 
to  the  point  often  made,  that  the  transportation  charge  on  coal 
is  so  high  as  to  constitute  a  serious  burden  upon  the  consumer, 
and  furthermore  that  the  method  of  increasing  freight  rates 
in  recent  years  has  greatly  augmented  that  burden. 

While  bituminous  coal  for  household  use  constitutes  be- 
tween 11%  and  12%  of  the  total  output,  about  3%  out  of 
this  12%  is  consumed  in  the  vicinity  of  the  mines  and  does 
not  move  on  railroad  lines.  On  the  remaining  9%  freight  is 
paid  from  the  mine  to  the  retail  dealer's  yard.  It  then  must 
bear  an  additional  transportation  charge,  namely,  the  trans- 
portation cost  of  the  retail  delivery  of  the  coal.  Little  definite 
detailed  information  is  available  as  to  this  particular  item  of 
transportation  cost.  Inquiry  among  representative  retail  deal- 
ers, however,  indicates  a  range  in  transportation  costs  for  the 
delivery  of  domestic  bituminous  coal  of  from  70  cents  per  ton 
to  $1.75  per  ton.  The  low  delivery  costs  are  obtained  where 
large  lots  are  delivered  regularly  in  5  to  10  ton  trucks.  The 
high  costs  are  incurred  in  small  Irregular  deliveries  to  house- 
holders. The  difference  in  the  volume  of  deliveries  may  double 
the  cost  of  delivery  in  summer  as  compared  with  winter.  It 
should  be  clearly  understood  here  that  haulage  cost  is  only 
a  part  of  the  cost  of  retailing  coal.  Office  and  yard  employees' 
wages  and  salaries,  insurance  premiums,  taxes,  telephone  and 
telegraph  charges,  allowance  for  depreciation  of  plant  and 
equipment,  and  losses  due  to  degradation  and  deterioration  of 
the  coal  handled,  constitute  a  large  part  of  the  total  cost  of 
retail  coal  distribution,  just  as  many  other  items  besides  haul- 
age go  to  make  up  the  total  cost  of  mining  coal. 


TRANSPORTATION  FACTOR  IN  THE  PRICE  OF  COAL        379 

What  is  the  prospect  for  a  reduction  in  some  of  these  trans- 
portation costs  in  the  prices  of  bituminous  coal? 

So  far  as  the  haulage  cost  in  the  mine  is  concerned,  reduc- 
tions in  wage  scales  at  the  bituminous  mines  will,  of  course, 
correspondingly  reduce  the  haulage  cost  of  the  coal,  and  there 
is  a  constant  progressive  improvement  in  mine  haulage  facili- 
ties and  methods  which  tend  to  lower  costs. 

With  respect  to  railway  transportation  charges  on  bitumin- 
ous coal,  the  Interstate  Commerce  Commission  now  1  has  under 
consideration  the  evidence  submitted  in  its  general  inquiry 
into  the  present  level  of  freight  rates.  As  railroad  operating 
costs  decline  we  may  expect  a  decline  in  the  railroad  trans- 
portation charges  on  coal. 

With  respect  to  the  cost  of  delivery  of  bituminous  coal  by 
retail  dealers,  so  far  as  wages  paid  employees  of  retail  coal  con- 
cerns may  be  reduced,  a  corresponding  reduction  in  such  retail 
delivery  costs  may  likewise  be  anticipated.  Better  methods  of 
distributing  household  coal  may  also  gradually  operate  in  the 
same  direction. 

It  is  frequently  suggested  that  a  steadier  movement  of  coal 
from  the  mines  to  the  user  would  materially  lower  the  trans- 
portation charge.  This  opinion  is  predicated  on  the  assump- 
tion that  bituminous  coal  moves  to  market  with  great  seasonal 
irregularity.  Examination  of  the  facts,  therefore,  may  be 
enlightening  as  to  the  possible  economies  in  the  transportation 
of  coal  which  might  be  effected  by  an  equalization  of  summer 
and  winter  movement. 

I  have  analyzed  the  production  of  bituminous  coal  as  re- 
ported by  the  United  States  Geological  Survey  month  by 
month  for  the  last  nine  years,  averaging  the  monthly  produc- 
tion for  the  six  summer  months,  April  to  September,  in  com- 
parison with  the  production  for  the  six  winter  months,  from 
October  to  March.  Such  analysis  shows  that  of  the  total  out- 
put of  bituminous  coal  during  these  nine  years,  48.9%  was 
produced  and  shipped  from  the  mines  in  the  six  summer  months 
and  51.1%  in  the  six  winter  months.  Considered  as  a  whole, 
therefore,  the  bituminous  coal  industry  is  not  at  all  a  seasonal 

1  April  28,  1922.  The  decision  handed  down  by  the  Interstate  Com- 
merce Commission  on  May  16,  1922,  reduced  all  freight  rates,  includ- 
ing those  on  bituminous  coal,  approximately  ten  per  cent,  effective 
July  1,  1922. 


380  RAILROADS  AND  BUSINESS  PROSPERITY 

industry ;  in  fact,  but  few  of  the  great  industries  of  the  United 
States  approach  it  in  steadiness  of  operation.  Whatever 
economies  might  be  expected  from  an  equalization  of  summer 
and  winter  movement  would  necessarily  be  confined  to  par- 
ticular coal-mining  districts  where  the  movement  of  coal  is 
seasonal. 

I  realize  that  a  general  statement  for  the  industry  as  a 
whole,  and  a  general  average  for  the  industry  as  a  whole,  is 
somewhat  like  the  average  temperature  of  the  patients  in  a 
hospital.  The  average  may  be  pretty  nearly  normal  and  yet 
a  particular  patient  may  be  seriously  ill. 

On  the  same  principle,  while  the  average  seasonal  variation 
for  the  whole  bituminous  coal  industry  is  low,  there  is  seasonal 
movement  in  some  mining  districts.  This  is  notably  true  in 
the  western  part  of  the  United  States,  where  the  chief  con- 
sumption of  bituminous  coal  is  in  the  households  and  where  the 
requirements  of  railways  and  industrial  establishments  are 
comparatively  small. 

At  this  point  let  me  direct  attention  to  the  difference  in 
summer  and  winter  consumption  of  some  of  our  major  indus- 
tries. Studies  by  the  United  States  Geological  Survey  indicate 
that  the  railways  of  the  United  States  consume  only  10%  or 
15%  more  coal  in  winter  than  in  summer.  The  great  public 
utilities,  gas  plants,  electrical  plants,  street  railway  systems, 
by-product  coke  plants  and  the  steel  industry  show  similar  very 
slight  differences  between  summer  and  winter  consumption  of 
coal.  The  cement-manufacturing  industry  consumes  more  coal 
in  the  summer  months  than  in  winter.  Throughout  the  great 
Appalachian  coal-mining  fields,  which  produce  some  two- 
thirds  of  our  total  annual  output,  the  great  bulk  of  the  pro- 
duction goes  to  these  transportation  and  industrial  users.  The 
slight  decline  in  their  summer  demands  upon  the  mines  is 
counterbalanced  by  the  summer  shipments  up  the  Great  Lakes 
to  the  Northwest,  and  by  rail  and  water  both  into  Canada  and 
into  New  England  for  storage  against  the  succeeding  winter's 
requirements.  Thus,  throughout  all  these  great  coal-producing 
districts  there  is  no  important  seasonal  fluctuation  in  the  pro- 
duction and  shipment  of  bituminous  coal. 

The  studies  of  the  United  States  Geological  Survey  already 
mentioned  show  that  the  one  striking  difference  in  amount  be- 


TRANSPORTATION  FACTOR  IN  THE  PRICE  OF  COAL        381 

tween  the  summer  and  the  winter  consumption  of  bituminous 
coal  is  found  in  the  consumption  of  households,  the  domestic 
users.  From  a  winter  maximum  of  10,000,000  tons  per  month, 
their  consumption  drops  in  the  summer  to  but  little  over 
2,000,000  tons  per  month.  Here  is  a  winter  maximum  five 
times  as  great  as  the  summer  minimum  compared  with  only 
10  to  20%  difference  in  the  case  of  the  railways  and  industrial 
consumers. 

Equalization  of  the  summer  and  winter  movement  of  coal 
from  the  bituminous  mines,  therefore,  considered  from  a  prac- 
tical standpoint  and  stripped  of  all  optimistic  misunderstand- 
ing, comes  simply  and  squarely  down  to  a  question  of  persuad- 
ing the  domestic  consumer  to  put  in  his  household  coal  in 
fairly  regular  quantities  throughout  the  year.  He  who  would 
regulate  the  production  of  bituminous  coal  for  the  purpose  of 
bringing  about  steady  mine  production  in  the  interest  of  coal 
mine  operators,  employees  and  consumers,  should  understand 
clearly  that  the  real  regulating  must  be  applied  not  to  the 
mines,  but  to  the  domestic  user  of  the  product. 

It  is  proper  at  this  point  to  consider  what  means  may  be 
employed  to  attempt  to  equalize  the  shipments  of  household 
coal  from  the  mines  throughout  the  year.  Seasonal  variations 
in  freight  rates  have  been  proposed  for  this  purpose.  The 
National  Coal  Association  has  neither  advocated  nor  opposed 
this  measure.  Operators  in  some  parts  of  the  country  favor 
seasonal  freight  rates;  other  operators  oppose  the  project.  It 
is  claimed  that  a  spread  between  summer  and  winter  rates  will 
induce  enough  householders  to  buy  coal  during  the  summer  so 
that  the  production  of  this  type  of  coal  and  operation  of  the 
mines  producing  it  will  be  stabilized  throughout  the  year. 
Opponents  of  this  proposal  assert  that  in  most  districts  a  very 
wide  spread  would  have  to  be  employed  in  order  to  bring 
about  such  a  result,  because  it  would  have  to  compensate  the 
consumer  for  the  additional  expense  entailed  in  carrying  his 
coal  supply  for  some  months  and  for  any  degradation  of  the 
coal  while  in  storage.  In  the  mining  districts  which  are  in 
most  need  of  summer  business,  the  mines  of  Oklahoma,  Kansas, 
Iowa  and  Illinois,  the  coal  deteriorates  decidedly  in  storage 
even  in  the  householders'  cellars,  while  the  output  of  the  lignite 
mines  of  Colorado,  which  furnish  the  fuel  of  Denver,  eastern 


382  RAILROADS  AND  BUSINESS  PROSPERITY 

and  western  Kansas,  and  Nebraska,  will  not  store  at  all,  but 
must  be  used  fresh  from  the  mines. 

Opponents  also  point  out  that  the  increased  railroad  rates 
on  coal  in  the  winter  time  would  have  to  be  paid  by  those 
consumers  who  can  least  afford  to  pay  the  charges,  namely: 
the  poorer  class,  those  householders  and  consumers  who  have 
neither  the  facilities  nor  the  money  to  permit  them  to  take 
advantage  of  the  lower  summer  rates.  Such  a  system,  there- 
fore, would  simply  penalize  these  poorer  consumers  of  coal  and 
benefit  their  richer  neighbors  at  their  expense.  Railroad  offi- 
cials object  that  a  decided  change  in  freight  rates  on  a  given 
date  would  result  in  shipments  being  withheld  just  prior  to  a 
decrease  in  freight  rates  and  being  increased  prior  to  an  ad- 
vance in  rates,  with  a  consequent  irregularity  of  mine  and 
railroad  operation  in  the  period  immediately  preceding  and 
following  the  change  in  rates. 

It  has  been  suggested  also  that  producers  of  bituminous  coal 
should  make  a  difference  in  their  prices  at  the  mine,  reducing 
the  price  levels  in  the  spring  and  gradually  increasing  them 
through  the  summer,  so  as  to  persuade  the  consumer  in  that 
manner  to  take  in  at  least  a  part  of  his  coal  supply  during  the 
spring  and  summer  months,  thereby  stabilizing  production. 

It  will  be  readily  seen  that  much  of  what  has  been  said  as  to 
seasonal  variations  in  freight  rates  applies  here  with  equal 
force.  In  addition,  it  should  be  pointed  out  that  competition 
in  the  open  market  normally  reduces  prices  to  their  lowest 
levels  in  the  early  spring  months  when  demand  is  at  a  mini- 
mum. Since  bituminous  coal  prices  are  determined  by  com- 
petition in  the  open  market  no  individual  operator,  or  group 
of  operators  is  any  more  able  to  arrange  in  advance  a  schedule 
of  prices  month  by  month  throughout  the  year  than  a  grower  of 
hogs  in  Indiana  can  determine  in  advance  the  price  at  which 
he  will  sell  his  hogs  in  different  months.  It  has  been  found 
possible  for  distributors  of  anthracite  coal  to  put  arrangements 
of  this  character  into  effect,  but  they  are  dealing  with  a  com- 
modity which  can  be  stored  readily  and  of  which  the  produc- 
tion is  limited  by  nature,  so  that  methods  of  marketing  the  out- 
put can  be  applied  there  which  are  wholly  impracticable  in 
the  case  of  bituminous  coal. 

It  is  frequently  urged  that  coal   producers  should  store  a 


TRANSPORTATION  FACTOR  IN  THE  PRICE  OF  COAL        383 

part  of  their  output  at  the  mines  in  summer  and  thus  render 
the  operation  of  their  properties  more  stable  and  regular. 
This  proposal  has  the  defect  of  being  impractical.  Coal  mines 
are  organized,  equipped  and  operated  to  send  coal  forward  on 
a  continuous  journey  from  the  face  of  the  coal  seam  to  the 
boiler  room  of  the  consumer.  The  production,  transportation 
and  distribution  of  that  coal  is  obtained  at  the  most  economical 
cost  when  that  movement  is  uninterrupted.  As  it  comes  from 
the  underground  mine  wagons  coal  is  dumped  directly  into 
railroad  cars  and  shipped  straight  through  to  the  plant  or  retail 
yard  of  the  buyer.  That  is  the  most  economical  manner  in 
which  coal  can  be  produced  and  moved.  If  it  is  carried 
two  or  three  miles  from  the  face  of  the  coal  seam  underground 
out  into  the  daylight  at  the  mouth  of  the  mine  and  there 
dumped  on  the  ground  or  put  into  storage  bins  from  which 
it  must  be  again  loaded  into  cars,  there  is  an  increase  in  the 
cost  of  the  coal  consequent  upon  the  additional  handling 
involved. 

There  is  also  a  certain  degradation  and  deterioration  of  the 
product  in  storage.  This  stored  coal  must  be  sold  by  the 
producer  who  has  stored  it  at  a  higher  price  than  his  freshly 
mined  coal,  if  he  is  to  avoid  a  loss  on  the  operation.  But  on 
account  of  the  deterioration  of  the  product  during  storage  this 
stored  coal  for  which  he  must  ask  a  higher  price  is  a  less  efficient 
and  less  desirable  fuel  than  his  freshly  mined  coal  which  his 
salesman  can  offer  at  a  lower  price.  If  he  should  attempt  to 
equalize  his  prices  or  place  a  sufficient  premium  upon  his 
freshly  mined  coal  to  allow  him  to  sell  his  higher-cost  storage 
coal  at  a  discount  he  will  merely  invite  numerous  competitors 
to  take  his  business  away  from  him  through  their  offers  of 
freshly  mined  coal  at  prices  below  his  quotations.  In  short, 
a  producer  who  should  store  considerable  quantities  of  his  own 
coal  at  the  mines  would  inevitably  find  himself  caught  between 
the  competition  of  his  own  freshly  mined  coal  and  his  stor- 
age coal,  and  would  have  to  accept  an  inevitable  loss  on  the 
transaction  in  consequence.  No  sane  business  man  would 
attempt  any  such  enterprise,  nor  would  he  get  any  sane  banker 
to  finance  it  even  if  he  were  foolish  enough  to  try  it. 

The  proposal  is  impracticable  for  another  reason.  The 
mines  already  open  have  an  over-capacity  of  approximately 


384  RAILROADS  AND  BUSINESS  PROSPERITY 

4:0%.  In  other  words,  these  mines  can  currently  furnish  40% 
more  freshly  mined  coal  than  the  country  needs.  In  the 
absence  of  strikes  at  the  mines  the  only  thing  which  has  ever 
prevented  the  mines  from  meeting  all  demands  of  consumers 
with  current  daily  shipments  of  freshly  mined  coal  direct  from 
the  mine  tipples  has  been  the  inability  of  the  railway  lines 
to  transport  the  tonnage  demanded  by  consumers.  These 
consumers  have  never  failed  to  get  their  coal  because  of  in- 
ability of  the  mines  to  produce  it,  but  only  through  the  in- 
ability of  the  railroads  to  handle  it  when  shipped.  Now,  if 
the  railroads  in  time  of  maximum  demand  are  not  able  to 
place  railroad  cars  enough  at  the  mines  to  carry  away  the  coal 
that  is  being  mined  from  day  to  day,  what  opportunity  would 
a  mine  operator  have  to  obtain  cars  to  take  coal  from  storage 
in  addition  to  shipping  his  usual  daily  output? 

As  a  matter  of  fact,  there  is  already  a  tremendous  storage 
of  coal  in  the  United  States,  not  in  the  mining  districts,  but 
where  the  storage  ought  to  be,  namely,  in  or  adjacent  to  the 
consuming  centers.  Consumers  and  wholesale  and  retail  dis- 
tributors of  coal  in  the  United  States  have  provided  facilities 
in  which  they  regularly  store  from  40,000,000  to  50,000,000 
tons  of  bituminous  coal  annually.  Just  prior  to  the  signing  of 
the  Armistice  they  had  stored  over  60,000,000  tons  and  at  the 
beginning  of  the  present  strike  they  had  utilized  these  facili- 
ties to  store  approximately  65,000,000  tons,  in  addition  to 
the  amount  upon  the  docks  at  the  head  of  the  lakes.  If  the 
capacity  of  these  docks  is  included,  the  total  possible  storage 
by  consumers  and  distributors  of  coal  in  the  United  States 
exceeds  70,000,000  tons.  This  is  practically  all  storage  by 
the  consumers,  who  own  these  great  stocks  and  are,  therefore, 
insured  against  any  raising  of  prices  on  this  tremendous  ton- 
nage. Storage  of  this  kind  has  developed  wherever  it  is  prac- 
tical ;  that  is,  wherever  the  service  to  the  user  of  the  coal  in 
actual  practice  justifies  the  investment  and  the  expense  of 
installing  and  operating  the  facilities  for  storage  and  com- 
pensates him  for  the  deterioration  of  the  coal. 

The  greatest  future  saving  in  the  cost  of  moving  coal  from 
the  mine  to  the  user  will  doubtless  come  not  through  the  adop- 
tion of  artificial  devices  in  the  coal  industry,  but  through  trans- 
porting the  energy  in  the  coal  instead  of  the  coal  itself.      By 


TRANSPORTATION  FACTOR  IN  THE  PRICE  OF  COAL        385 

this  I  mean  that  long-distance,  high-tension  transmission  of 
electricity  and  the  transmission  of  gas  manufactured  from  the 
coal  will  be  the  practical  means  of  reducing  the  transportation 
cost  to  the  user  of  the  energy  of  coal.  Engineers  already  look 
forward  to  utilizing  a  large  part  of  the  output  of  bituminous 
coal  at  the  mines  or  in  the  immediate  vicinity  of  the  mines  and 
to  transmitting  from  the  mines  to  important  consuming  centers 
in  the  form  of  electricity  or  gas  the  energy  thus  developed 
from  the  most  efficient  combustion  of  the  coal.  They  also  look 
forward  to  a  much  more  general  use  of  gas  as  a  domestic  and 
household  heating  fuel  than  at  present.  Such  transmission  of 
energy  from  the  mines  would  go  far  to  remove  coal  from  the 
rails  of  our  transportation  systems,  upon  which  coal  now 
constitutes  approximately  one-third  of  all  the  freight  moved. 
Improvement  in  the  manufacture  of  gas  from  coal,  with  the 
consequent  wider  use  of  gas  as  a  domestic  fuel,  is  expected  to 
reduce  the  ultimate  cost  of  heating  our  dwellings.  There  is 
not  time  here  to  discuss  the  details  of  developments  in  these 
directions.  Let  me  merely  say  that  competent  authorities  be- 
lieve the  future  will  bring  almost  revolutionary  changes  in  the 
transportation  of  coal  through  the  means  just  indicated. 


APPENDIX 

THE  SEMI-ANNUAL  MEETING  (FORTY-SECOND  YEAR)  OF 

THE    ACADEMY    OF    POLITICAL    SCIENCE, 

NEW  YORK  CITY,  APRIL  28,  1922 

The  Committee  on  Arrangements,  which  also  served  as  the 
Program  Committee,  planned  for  three  sessions  at  this  meet- 
ing to  consider  the  three  most  important  problems  growing 
out  of  the  actual  experience  of  the  country  with,  and  operations 
under,  the  "  Transportation  Act,  1920."  The  Academy,'  at  its 
Annual  Meeting  in  November,  1919,  had  discussed  quite  fully 
the  railroad  problem  in  all  its  various  aspects  at  the  close  of  the 
wrar  and  while  the  railroads  were  still  under  Federal  control. 
The  very  substantial  volume  on  "  Railroad  Legislation  " 
{Proceedings  of  the  Academy  of  Political  Science,  Vol.  VIII, 
no.  4,  Jan.,  1920,  268  pp.),  which  contains  the  papers  and  ad- 
dresses presented  at  that  meeting,  gives  a  good  account  of  the 
considerations  under  discussion  in  Congress  while  the  Trans- 
portation Act  was  still  in  its  formative  stages.  This  volume, 
together  with  the  text  of  the  Transportation  Act,  1920  (Act 
Feb.  28,  1920),  which  is  too  voluminous  to  reproduce  here, 
should  be  studied  as  the  basis  of  the  program  of  the  meeting 
of  April  28,  1922. 

The  three  problems  which  seemed  to  the  Committee  to  cover 
the  most  important  matters  of  present  public  interest  and  to 
serve  as  a  means  of  following  up  the  discussion  of  railroad 
legislation  at  the  Annual  Meeting  of  the  Academy  in  Novem- 
ber, 1919,  are:  (1)  The  labor  provisions  of  the  Transportation 
Act;  (2)  The  general  railway  policies  of  regulation  and  control 
with  respect  to  the  general  or  public  welfare;  (3)  Freight  rates 
and  business  revival.  To  each  of  these  a  special  session  of  the 
meeting  of  April  28,  1922,  was  devoted. 

The  thanks  of  the  Academy  are  due  to  the  railway  executives 

and  to  the  economists  and  publicists  who  have  specialized  in 

transportation   problems,  who  gave  generously  of  their  time 

and  service  in  the  work  of  the  Committee  on  Arrangements,  and 

in  the  preparation  of  papers  and  addresses  delivered  at  the 

meeting. 

387 


388 


RAILROADS  AND  BUSINESS  PROSPERITY 


COMMITTEE  ON  ARRANGEMENTS 
SAMUEL  McCUNE  LINDSAY,  Chairman  ex-officio 


FRANK  H.  DIXON 
HOWARD  ELLIOTT 
MILTON  W.  HARRISON 
ELON  HUNTINGTON  HOOKER 
EMORY  E.  JOHNSON 
ROBERT  S.  LOVETT 
YICTOR  MORAWETZ 
CHARLES  P.  NEILL 


WILLIAM  L.  RANSOM 
CHARLES  M.  SCHWAB 
HENRY  R.  SEAGER 
EDWIN  R.  A.  SELIGMAN 
ALBERT  SHAW 
T.  W.  VAN  METRE 
PAUL  M.  WARBURG 
FRANK  J.  WARNE 


THE  PROBLEM  OF  RAILROAD  CONTROL 

EMORY  R.  JOHNSON 

Dean  of  the  Wharton  School  of  Finance  and  Commerce, 
University  of  Pennsylvania 

FOR  fifty  years  the  American  people  have  almost  contin- 
uously had  under  consideration  the  problem  of  railroad 
control.  The  particular  questions  to  be  solved  change 
decade  by  decade  with  variations  in  economic  conditions  and 
with  the  evolution  of  political  ideals  and  institutions;  but  the 
railroad  problem,  like  the  poor,  is  always  with  us,  and  is  at  all 
times  fundamentally  the  same — how  can  the  public  secure  ade- 
quate and  efficient  transportation  services  at  rates  and  fares 
that  are  reasonable  and  just  to  all  parties  concerned. 

This  is  a  period  of  economic  reconstruction.  The  processes 
of  production,  transportation  and  trade  were  so  disorganized  by 
the  World  War,  and  the  powers  of  economic  recuperation  were 
so  enfeebled  by  that  great  conflict,  as  to  make  it  inevitable  that 
the  world  should  for  a  period  of  years  be  slowly  struggling 
back  to  its  former  virility.  The  railroad  problem  of  the  hour 
is  part  of  a  world-wide  economic  disorder,  and  it  is  not  to  be 
hoped  that  the  difficulties  confronting  American  railroads  can 
be  fully  overcome  until  the  nations  of  the  world  are  again  func- 
tioning normally  in  their  political,  economic  and  social  life. 
However,  while  the  condition  of  the  railroads  of  the  United 
States  is  a  part  of  a  general  situation,  the  railway  problem  in 
this  country  has  its  particular  aspects  which  may  well  be  con- 
sidered with  a  view  to  determining  what  public  policy  should 
be  adopted  and  what,  if  anything,  can  be  accomplished  by  legis- 
lation. The  present  problem  will  be  better  understood  by  re- 
viewing briefly  its  antecedents. 

The  Problem  of  1919  l 

When  fighting  was  brought  to  an  end  by  the  armistice,  the 
railroads  of  the  United   States   had  been   under  government 

1  For  a  discussion  of  the  problems  of  railroad  regulation  as  they 
presented  themselves  in  1919,  consult  the  papers  contained  in  the 
volume  containing  the  proceedings  of  the  Annual  Meeting  of  the 
Academy  of  Political  Science,  held  in  New  York  City,  November  21- 
22,  IQIQ.     Published  as  vol.  viii  of  the  Proceedings  of  that  Academy. 

389 


390  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

operation  for  somewhat  less  than  a  year,  but  the  period  of 
government  operation  was  extended  to  March  1,  1920,  a  total 
of  twenty-six  months.  Throughout  the  year  1919,  earnest 
consideration  was  given  by  all  people  to  the  question  of  the 
future  railway  policy  of  the  United  States.  Out  of  the  discus- 
sions in  the  press  and  on  the  forum,  there  not  unnaturally 
emerged  three"  distinct  views,  each  of  which  was  urgently 
championed.  Government  officials  of  the  railroad  administra- 
tion led  by  the  Director-General  of  Railroads,  Mr.  William  G. 
McAdoo,  urged  Congress  to  extend  the  period  of  federal  opera- 
tion for  five  years  from  the  first  of  January,  1919.  It  was 
urged  by  Mr.  McAdoo,  and  for  a  time  by  his  successor,  Mr. 
Walker  D.  Hines,  that  the  country  should  avail  itself  of  this 
opportunity  to  ascertain  what  could  be  accomplished  by  the 
government  operation  of  railroads.  He  saw,  or  felt  that  he 
saw,  great  opportunity  of  accomplishing  the  unification  of  the 
transportation  systems  of  the  United  States  by  government 
operation.  He  pictured  to  himself  a  national  transportation 
system  in  which  railroads,  waterways  and  other  agencies  were 
so  coordinated  as  to  be  of  maximum  efficiency  and  economy. 
It  was  an  attractive  dream,  but  its  realization  would  have  invol- 
ved the  success  of  the  government  of  the  United  States  in  the 
operation  and  development  of  the  railroads  and  other  transpor- 
tation facilities.  As  is  usual  with  men  of  the  promotive  type, 
Mr.  McAdoo  kept  his  mind  upon  the  desired  goal,  and  ignored 
intervening  obstacles. 

It  was  inevitable  that  agitation  for  the  adoption  of  a  policy 
of  government  ownership  and  operation  should  follow  the  tak- 
ing-over of  the  railroads  by  the  government  for  operation  as  a 
war  measure.  The  propaganda  for  government  ownership  as  a 
permanent  policy  was  led  by  the  brotherhoods  and  unions  of 
railway  employees,  whose  leaders  evidently  felt  that  they  could 
more  readily  control  wages  and  working  conditions  in  a  regime 
of  government  ownership  and  operation.  The  leader  of  the 
propaganda  was  Mr.  Glenn  R.  Plumb,  an  attorney  of  the 
brotherhoods,  who  presented  an  ingenious  plan  for  the  purchase 
of  the  railroads  by  the  government  and  for  their  operation  by 
a  board  of  fifteen  men,  ten  of  whom  were  to  consist  of  the 
railway  employees  and  officials,  the  other  five  being  representa- 
tives of  the  public.     The  Plumb  plan  received  the  official  sup- 


No.  3]  THE  PROBLEM  OF  RAILROAD  CONTROL  391 

port  of  the  railway  employees'  organizations,  although  by  no 
means  the  united  support  of  all  the  members  of  these  associa- 
tions, but  the  plan  met  with  little,  if  any,  support  on  the  part 
of  the  public  generally. 

As  the  year  1919  progressed,  it  became  increasingly  evident 
that  the  great  majority  of  the  American  people  and  their  rep- 
resentatives in  Congress  were  in  favor  of  the  return  of  the  rail- 
roads to  their  corporate  owners  and  the  resumption  of  private 
operation  of  the  railroads.  Upon  numerous  questions  of  public 
policy,  such  as  competition,  rate  regulation,  the  adjustment  of 
wages  and  working  conditions  etc.,  there  were  marked  differ- 
ences of  opinion,  but  upon  the  fundamental  question  as  to  the 
desirability  of  private  ownership  and  operation  of  railroads  in 
the  United  States,  there  was  no  serious  question  in  the  mind  of 
the  public. 

While  it  is  probable  that  the  majority  of  the  people  in  the 
United  States,  had  they  been  given  an  opportunity,  would  have 
declared  in  favor  of  the  continuance  of  competition  among 
private  railroads,  it  is  also  true  that  those  persons  who  have 
made  a  careful  study  of  railroad  questions  saw  clearly  that  there 
should  ultimately,  if  not  immediately,  be  a  great  reduction  in 
the  number  of  railroad  corporations.  There  were  one  hundred 
and  eighty-seven  railroad  systems  of  class  one  (companies 
having  annual  gross  earnings  of  a  million  dollars  or  more),  and 
it  was  not  difficult  to  see  that  this  number  was  excessive  and 
that  many  of  these  railroad  companies,  roughly  forty  per  cent 
of  them,  were  too  weak,  because  of  their  past  history,  their 
existing  traffic  opportunities,  or  their  present  financial  status,  to 
render  the  public  efficient  service  and  to  insure  the  sections  of 
country  they  served  future  railroad  systems,  vigorous  and  pro- 
gressively efficient. 

Railway  consolidation  was  realized  by  the  clear-sighted  to  be 
an  ultimate,  if  not  immediate,  necessity.  There  was  some  sen- 
timent in  favor  of  dividing  the  country  up  territorially  and 
creating  in  each  of  those  sections  a  single  railroad  system,  built 
up  out  of  the  numerous  lines  owned  by  existing  corporations. 
In  accordance  with  this  plan,  a  federal  corporation  would  have 
been  created  to  take  over  the  railroads  in  each  section.  This 
would  have  been  the  adoption  of  the  principle  of  monopoly  in 
the  future  management  of  the  railroads  and  would  probably 


392  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

have  been  a  mistake.  When  Congress  came  to  act,  it  favored 
the  maintenance  of  competition  among  private  railroads,  but 
provided  for  their  voluntary  consolidation.  There  were  many 
in  favor  of  compulsory  consolidation,  but  it  did  not  receive 
popular  support,  at  least,  the  support  of  the  House  of  Repre- 
sentatives. This  is  one  of  the  questions  which  the  American 
people  must  reconsider.  Consolidation  must  be  brought  about 
before  the  railroad  problem  can  be  finally  and  satisfactorily 
solved. 

It  was  evident  in  1919  that  the  government  was  incurring  a 
large  deficit  in  the  operation  of  the  railroads,  and  that  it  would 
be  impossible  for  the  corporate  owners  of  the  railroads  to 
operate  their  properties  profitably  without  a  large  increase  in 
net  revenues.  Expenses  of  operation  had  greatly  increased 
during  the  war,  partly  as  a  result  of  the  war,  and  partly  because 
of  policies  adopted  by  the  government  in  dealing  with  railway 
labor.  The  problem  that  had  to  be  considered  first  of  all  in 
returning  the  railroads  to  their  owners  was  the  restoration  of 
railroad  credit.  Economic  conditions  generally  were  depressed. 
Railroad  operations  were  unprofitable.  The  corporate  owners 
of  the  railroads  would  need  capital  to  repair  the  wastes  of  war 
and  to  provide  facilities  for  the  traffic  demands  of  the  future. 
This  capital  must  come  from  private  sources.  Would  investors 
advance  the  funds?  If  they  did  not,  the  railroads  would  de- 
teriorate unless  the  government  advanced  the  necessary  capital, 
and  if  the  government  were  to  embark  upon  such  a  policy, 
ultimate  public  ownership  would  be  the  probable  consequence, 
as  has  been  amply  shown  by  the  experience  of  other  countries 
in  similar  enterprises. 

While  the  public  was  desirous  that  the  capital  required  by  the 
railroads  should  come  from  private  investors,  it  was  clear  to 
everybody  that  the  time  had  come  for  the  federal  regulation  of 
the  issue  of  railroad  securities.  Some  of  the  states  had  for 
many  years  regulated  the  issue  of  securities,  but  only  a  small 
minority  of  the  states  had  attempted  to  make  such  regulation 
thorough  and  effective,  and  even  those  states  were  able  but 
partially  to  accomplish  their  purpose,  because  regulation  was 
not  general  on  the  part  of  all  states.  Massachusetts  and  New 
York  might  have  laws  for  the  regulation  of  railroad  securities, 
but  a  Connecticut  corporation  like  the  New  Haven  might  be 


No.  3]  THE  PROBLEM  OF  RAILROAD  CONTROL  393 

wrecked  by  the  pyramiding  of  securities  in  the  interest  of  finan- 
cial speculators.  Thus  the  public  decided  in  1919  that  when 
the  railroads  were  returned  to  their  owners,  the  government  of 
the  United  States  should  be  given  authority  to  pass  upon  the 
advisability  of  proposed  investments  and  upon  the  nature  and 
volume  of  securities  that  may  be  issued  to  secure  funds  for 
carrying  out  approved  enterprises. 

Any  policy  intended  to  reestablish  the  credit  of  the  railroads 
after  their  return  to  their  corporate  owners  must  necessarily 
involve  a  policy  of  rate  regulation  different  from  the  policy  that 
had  been  followed  prior  to  government  operation.  Foj  some 
years  before  the  government  took  over  the  railroads,  rates  had 
been  so  regulated  by  the  Interstate  Commerce  Commission  as 
to  limit  the  earnings  upon  railroad  investments  as  a  whole  to 
such  a  low  rate  of  income  that  investors  had  already  begun  to 
avoid  railroad  securities.  Between  1912  and  1917,  a  few  rail- 
roads, even  the  more  prosperous  ones,  were  able  to  sell  stocks 
at  a  figure  which  justified  the  issue  of  securities  in  that  form. 
Most  of  the  new  capital  required  by  the  railroads  had  to  be 
obtained  by  the  issue  of  bonds,  and  thus  the  desirable  ratio  of 
50-50  as  between  stocks  and  bonds  had  to  be  abandoned,  and 
the  indebtedness  of  the  railroad  companies,  at  least  of  many  of 
the  companies,  became  so  large  as  to  endanger  their  financial 
stability. 

It  was  clear  that  the  future  control  of  railroad  rates  by  the 
government  should  be  constructive  rather  than  merely  correc- 
tive in  purpose.  The  laws  of  1906  and  1910  had  vested  the 
control  of  rates  and  revenues  in  the  government,  which  thereby 
became  responsible  for  the  net  revenues  and  the  financial  integ- 
rity of  the  railroad  corporations.  If  the  government  were, 
upon  the  return  of  the  railroads  to  their  owners,  to  continue  to 
determine  the  revenues  of  the  carriers,  and  if  it  were  allowed  to 
sit  in  judgment  upon  security  issues,  it  was  seen  that  it  would 
be  necessary  for  the  rate-making  authority,  that  is,  the  Inter- 
state Commerce  Commission,  to  be  responsible  for  the  estab- 
lishment of  rates  that  would  yield  the  carriers  revenues  sufficient 
to  enable  them  to  render  efficient  services  and  to  provide  the 
country  with  a  system  of  railroad  transportation  capable  of 
progressing  with  the  development  of  the  country.  Any  policy 
of  rate  control  that  stopped  short  of  this  degree  of  responsi- 


394  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXX VL 

bility  on  the  part  of  the  government  would  be  disastrous  to  the 
American  railroad  system. 

When  it  became  evident  that  the  federal  government  in  the 
regulation  of  the  railroads  must  assume  responsibility  for  their 
financial  stability  and  for  rates  and  revenues  that  would  enable 
the  country  to  .enjoy  a  progressively  efficient  system  of  rail 
transportation,  it  was  clearly  seen  that  the  central  government 
must  not  allow  its  rate  policies  to  be  negatived  or  seriously  in- 
terfered with  by  the  states  in  their  control  over  charges  for 
intra-state  transportation. 

In  the  Minnesota  Rate  Case  in  1913  (Simpson,  et  al.  v. 
Shepherd,  230  U.  S.  352),  and  in  the  Shreveport  Rate  Case  in 
1914  (234  U.  S.  342)  the  Supreme  Court  had  established  the 
principle  that  the  state  rate  must  give  way  to  the  federal  rate 
when  the  charges  established  by  the  state  limited  the  regulatory 
powers  of  the  federal  government  or  established  an  unreason- 
ably discriminatory  relationship  between  the  state  and  inter- 
state rates.  The  order  issued  by  the  Interstate  Commerce 
Commission  in  the  Shreveport  case  was  upheld  by  the  court, 
but  it  has  been  found  difficult  in  practice  so  to  apply  the  prin- 
ciple established  by  the  Shreveport  decision  as  to  prevent  a. 
serious  interference  on  the  part  of  the  states  with  the  regulation 
of  interstate  rates  by  the  federal  government.  The  correction 
of  this  situation  was  one  of  the  objects  to  be  accomplished  upon 
the  return  of  the  railroads  to  their  corporate  owners  for 
operation. 

None  of  the  problems  connected  with  the  return  of  the  rail- 
roads to  their  owners  was  more  perplexing  or  more  provocative 
of  divergent  views  than  the  policy  that  should  be  adopted  for 
the  future  regulation  of  the  wages  and  working  conditions  of 
the  army  of  railroad  employees".  From  1912  to  1917  the 
country  was  frequently  confronted  with  the  menace  of  a  para- 
lyzing railroad  strike,  and  railroad  labor  problems  were  acute 
throughout  this  five-year  period.  If  there  was  a  justification 
for  the  assumption  of  the  operation  of  the  railroads  by  the 
United  States  Government,  it  was  to  be  found  mainly  in  the 
fact  that  during  the  period  of  the  war  the  country  could  not 
permit  the  railways  to  be  tied  up  or  even  seriously  hampered 
by  labor  controversies.  The  other  major  reason  for  government 
operation  was  that  large  expenditures  must  be  made  promptly 


No.  3]  THE  PROBLEM  OF  RAILROAD  CONTROL  395 

by  the  railroads  in  order  to  meet  the  extraordinary  demand  for 
service  placed  upon  them  by  the  government  in  the  prosecution 
of  the  war. 

In  my  judgment,  both  of  these  problems  could  have  been 
met  without  resort  to  government  operation.  The  Railroad 
War  Board,  established  by  the  railway  executives  in  the  spring 
of  1917,  was  bringing  about  the  coordination  of  the  railroads, 
and  more  traffic  was  being  moved  than  had  ever  previously 
been  transported.  Acting  under  his  war  powers,  the  President 
could  have  given  this  railroad  war  board  greater  authority,  and 
financial  support  might  have  been  given  to  the  railroads,  under 
conditions  that  would  have  safeguarded  the  public  interest.  A 
discussion  of  what  might  have  taken  place  at  the  end  of  1917 
is,  however,  academic.  The  railroads  were  taken  over  by  the 
government  in  order  that  the  executive  authority  might  remove 
the  menace  of  strikes,  might  relieve  the  railroads  from  the 
limitations  imposed  by  existing  anti-trust  laws,  give  the  com- 
mon carriers  needed  governmental  aid,  and  hasten  the  coor- 
dination of  the  several  railroad  lines  into  a  unified  and  efficient 
transportation  system. 

When,  in  1919,  consideration  was  being  given  by  the  public 
to  the  conditions  under  which  the  railroads  should  be  returned 
to  their  corporate  owners,  much  thought  was  given  to  problems 
of  service,  with  the  hope  of  retaining  under  private  operation 
the  service  advantages  of  unified  management  that  had  been 
secured  during  the  period  of  government  control.  It  was  rea- 
lized by  the  public  that  railroads  and  waterways  ought  not  to 
be  kept  dissociated  and  forced  to  serve  as  unrelated  competi- 
tors. The  necessity  of  providing  for  a  unified  service  by  con- 
nected and  cooperating  rail  and  water  lines  was  realized.  It 
was  also  clear  that  terminal  operations  in  the  future  could  be 
brought  about  by  treating  each  urban  district,  no  matter  \>y  how 
many  railroads  it  might  be  served,  as  a  single  terminal  in  which 
the  various  freight  yards  and  stations  of  the  several  carriers  and 
their  tracks  and  yards  were  coordinated  for  the  performance 
of  a  unified  service.  The  realization  of  this  project  for  the 
reorganization  of  terminals  will  take  time,  but  the  advantages 
to  be  gained  by  it  are  manifest. 

When    the   government   operated   the    railroads,    the   entire 
equipment  of  different  types  of  freight  cars  was  used  without 


396  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

much  regard  to  ownership.  The  railroad  stock  in  the  country 
was  utilized  as  a  whole.  Freight  cars  became  legal  tender  and 
remained  in  circulation  when  and  where  needed,  instead  of 
being  redeemed  by  frequent  return  to  their  owners.  This  use 
of  rolling  stock  was  made  to  meet  a  national  emergency,  and  it 
was  recognized  by  the  public  that  provision  should  be  made  for 
its  similar  use  in  the  future  to  meet  any  crisis  that  might  arise 
under  peace  or  war  conditions. 

The  Solution  Attempted  by  the  Transportation  Act  of  IQ20 

To  provide  for  the  return  of  the  railroads  from  the  govern- 
ment to  their  owners,  under  terms  that  would  meet  the  railroad 
situation  as  it  had  come  to  be  understood  during  the  year  fol- 
lowing the  armistice,  the  Transportation  Act  of  1920  was  passed 
by  Congress.  It  was  approved  February  28,  and  provided  for 
the  return  of  the  railroads  to  their  owners  on  the  first  of  March 
of  that  year. 

The  law  provided  for  the  maintenance  of  competition  in  the 
operation  of  the  railroads,  the  grouping  of  the  railroads  terri- 
torially or  otherwise  not  being  required.  The  Act,  however, 
gave  the  Interstate  Commerce  Commission  power  to  compel  the 
owner  of  a  railroad  terminal  to  permit  other  carriers  to  use  the 
terminal  in  return  for  reasonable  compensation.  Thus  a  begin- 
ing  was  made  in  what  will  ultimately  be  the  unification  of  rail- 
road terminals.  Competing  carriers  were  also  given  permission 
to  pool  their  traffic  and  earnings  after  securing  approval  of  the 
Interstate  Commerce  Commission.  The  consolidation  of  rail- 
roads while  not  made  compulsory  was  made  possible.  The  law 
requires  the  Interstate  Commerce  Commission  to  work  out  a 
plan  for  the  grouping  or  consolidation  of  the  railroads  into  a 
limited  number  of  systems  that. 

shall  be  so  arranged  that  the  cost  of  transportation  as  between  com- 
petitive systems  and  as  related  to  the  values  of  the  properties  through- 
out the  service  as  rendered  shall  be  the  same,  so  far  as  practicable,  so 
that  these  systems  can  employ  uniform  rates  in  the  movement  of 
competitive  traffic  and  under  efficient  management  earn  substantially 
the  same  rate  of  return  upon  the  value  of  their  respective  railway 
properties. 

The  law  thus  contemplates  the  ultimate  consolidation  of  rail- 
roads by  voluntary  action  of  the  carriers  and  the  maintenance 
of  competition  among  the  permanent  systems.     The  Senate  Bill 


No.  3]  THE  PROBLEM  OF  RAILROAD  CONTROL  397 

provided  for  the  compulsory  consolidation  of  railroads,  but  in 
conference  the  Senate  gave  way  to  the  House,  and  voluntary 
consolidation  was  agreed  upon  as  a  compromise.  It  is  probable 
that  future  legislation  upon  railroad  consolidation  will  be  neces- 
sary, and  that  the  government  will  ultimately  be  obliged  to 
compel  the  grouping  of  railroads  into  the  contemplated  limited 
number  of  permanent  competitive  systems  of  relatively  equal 
strength  and  stability. 

The  most  constructive  parts  of  the  Transportation  Act  of 
1920  were  those  providing  for  the  restoration  of  railroad  credit, 
for  the  regulation  of  railroad  finances,  and  for  the  establishment 
by  government  authority  and  responsibility  of  rates  sufficient  to 
yield  a  rate  of  return  designated  by  the  statute  as  reasonable. 
Some  of  these  provisions  were  temporary,  others  were  of  a 
permanent  nature.  The  temporary  provisions  included  (1)  the 
proviso  that  rates  in  force  at  the  time  of  the  return  of  the  rail- 
roads to  their  owners  should  remain  in  effect  until  changed  by 
state  or  federal  authority,  and  that  no  reduction  in  such  rates 
should  be  made  during  the  first  six  months  of  private  operation 
(before  the  end  of  this  period,  rates  were  largely  increased  by 
the  Interstate  Commerce  Commission)  ;  (2)  the  provision  that 
the  government  guarantee  of  the  net  return  which  had  been 
assured  the  railroads  during  the  period  of  government  opera- 
tion should  be  continued  until  September  1,  1920;  and  (3) 
the  appropriation  of  three  hundred  million  dollars  as  a  revol- 
ving fund  from  which  loans  might  be  made  to  the  carriers  to 
help  tide  them  over  the  period  of  transition  from  government 
to  private  operation.  The  carriers  were  also  to  be  allowed  to 
fund  their  indebtedness  to  the  United  States  government  for  a 
period  of  ten  years  at  the  rate  of  six  per  cent  per  annum. 

The  most  important  permanent  provision  included  in  the 
Transportation  Act  with  the  intention  of  giving  financial  stabil- 
ity to  the  railways  of  the  United  States,  was  that  which  con- 
cerned the  future  policy  of  rate-making  and  rate  regulation. 
A  new  principle  of  rate  control  was  adopted.  The  Interstate 
Commerce  Commission  was  authorized  to  divide  the  United 
States  into  an  appropriate  number  of  districts  for  rate-making 
purposes,  and  the  Commission  has  established  four  districts: — 
Eastern,  Southern,  Western  and  Mountain-Pacific.  The  aggre- 
gate value  of  the  railroad  property  devoted  to  the  public  service 


398 


POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 


in  each  of  these  districts  was  to  be  determined,  and  the  Com- 
mission was  to  authorize  and  establish  rates  and  fares  that  will 
yield  the  carriers  a  reasonable  return  upon  the  aggregate  value 
of  the  property.  For  the  two  years  following  March  1,  1920, 
the  statute  declared  a  reasonable  return  to  be  5>4  per  cent  per 
annum,  and  the  Commission  was  authorized  to  allow  the  car- 
riers to  earn  and  retain  an  additional  >4  per  cent  upon  the  ag- 
gregate value  of  railway  property,  this  additional  l/2  per  cent  to 
be  devoted  to  improvements  and  not  to  be  capitalized.  Any 
carrier's  earnings  in  excess  of  6  per  cent  per  annum  are  to  be 
divided  with  the  government.  After  March  1,  1922,  the  Inter- 
state Commerce  Commission  is  to  determine  what  rate  per  cent 
per  annum  upon  the  aggregate  value  of  railroad  property  shall 
be  a  reasonable  return  to  the  carriers. 

This  policy  of  rate  control  differs  radically  from  the  policy 
adhered  to  prior  to  government  operation.  Up  to  that  time 
regulation  was  exercised  for  the  purpose  of  preventing  the  car- 
riers from  charging  unreasonable  rates.  It  was  regulation  of  a 
corrective  and  negative  character.  In  the  future,  the  Govern- 
ment is  to  act  positively  and  to  establish  reasonable  rates,  and. 
the  statute  for  the  first  time  defines  what  the  standard  of  reason- 
ableness shall  be.  This  is  a  large  forward  step  in  government 
control  of  railroads  in  the  United  States. 

In  the  regulation  of  rates,  the  difficulty  of  the  problem  has 
grown  mainly  out  of  the  fact  that  charges  over  competitive 
routes  for  similar  services  must  be  the  same;  also,  that  for  like 
services  in  different  sections  of  the  country  there  cannot  prop- 
erly be  wide  differences  in  the  charges.  Some  railroad  lines 
are  favorably  located,  have  abundant  traffic,  and  are  economi- 
cally and  profitably  managed.  Other  lines,  over  which  the 
charges  in  many  instances  must  be  the  same  as  those  of  their 
prosperous  competitors,  are  poorly  located,  have  light  traffic,, 
and  can  be  operated  profitably  only  under  the  most  favorable 
conditions.  If  rate  systems  are  established  that  will  yield 
profits  to  the  "  weak  sisters  ",  the  stronger  brothers  will  be 
favored  with  larger  rail  rates  than  the  public  should  be  required 
to  provide.  This  situation  cannot  be  altered  except  by  the 
consolidation  of  all  the  railroads  into  a  limited  number  of  per- 
manent systems  of  relatively  equal  strength.  For  this  reason 
consolidation  must  ultimately  be  accomplished.      If  it  does  not 


No.  3]  THE  PROBLEM  OF  RAILROAD  CONTROL  399 

come  about  voluntarily,   as  it  probably   will   not,   it  must  be 
brought  about  by  the  government. 

One  of  the  most  satisfactory  provisions  of  the  Transportation 
Act  of  1920  is  the  one  which  writes  into  the  law  the  principle 
established  by  the  Supreme  Court  in  the  Shreveport  decision. 
A  rate  established  by  a  state  authority  must  give  way  to  the 
lawful  interstate  rate  whenever  the  Interstate  Commerce  Com- 
mission "  after  full  hearing  finds  that  any  such  [state]  rate, 
fare,  charge,  classification,  regulation,  or  practice  causes  any 
undue  or  unreasonable  advantage,  preference,  or  prejudice  as 
between  persons  or  localities  in  intra-state  commerce  on  the 
one  hand,  and  interstate  or  foreign  commerce  on  the  other  ". 
In  the  case  of  an  unreasonable  discrimination  caused  by  the 
state  rate,  the  Interstate  Commerce  Commission  may  prescribe 
the  intra-state  rate  thereafter  to  be  charged,  "  the  law  of  any 
state  or  the  decision  of  a  state  authority  to  the  contrary  not- 
withstanding ".  However,  in  the  hearing  and  the  determination 
of  cases  involving  the  relation  of  interstate  and  intra-state  rates, 
the  Interstate  Commerce  Commission  may  confer  with  the 
authorities  of  the  states,  and  avail  itself  of  the  cooperation  of 
state  authorities  in  the  enforcement  of  any  provisions  of  the 
law.  The  rate-regulating  authorities  of  most  of  the  states  have 
united  in  a  case  that  is  now  pending  in  the  Supreme  Court  of 
the  United  States  to  determine  whether  this  part  of  the  Trans- 
portation Act  of  1920  is  an  invasion  of  the  constitutional  rights 
of  the  states.  What  the  decision  of  the  Supreme  Court  will  be 
remains  to  be  seen,  but  the  Court  can  hardly  fail  to  follow  the 
course  it  adopted  in  reaching  the  Shreveport  decision. 

In  the  future,  railway  properties  and  railroad  investments  are 
not  to  be  made  the  prey  of  unscrupulous  speculators  as  they 
have  too  frequently  been  made  in  the  past.  Permission  must 
be  secured  from  the  Commission  for  the  extension  of  a  railroad 
line  or  the  construction  of  a  new  road,  and  the  Commission 
must  be  convinced  of  the  public  necessity  and  convenience  of 
the  proposed  investment.  Securities  to  obtain  new  capital  are 
to  be  issued  only  upon  approval  of  the  Commission,  and  the 
securities  shall  be  put  out  "  upon  such  terms  and  conditions  as 
the  Commission  may  deem  necessary  or  appropriate  in  the 
premises".  Public  authority  now  sits  in  judgment  upon  the 
necessity  of  any  railroad  investments,  determines  what  amount 


400  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

of  new  capital  it  is  necessary  to  invest,  decides  what  kinds  of 
securities  may  be  issued  and  the  terms  upon  which  these  secur- 
ities may  be  offered  to  the  public.  The  days  of  stock-watering 
and  "  high  finance  "  in  the  railroad  business  are  presumably  at 
an  end. 

The  labor  provisions  of  the  Transportation  Act  of  1920  are 
an  example  of  the  kind  of  compromises  all  too  characteristic  of 
important  legislation.  The  Senate,  led  by  the  able  Chairman 
of  its  Committee  on  Interstate  Commerce,  Albert  B.  Cummins, 
adopted  the  principle  of  compulsory  arbitration  of  disputes  as 
to  wages  and  working  conditions  in  the  railway  service.  The 
Committee  on  Interstate  and  Foreign  Commerce  of  the  House 
of  Representatives  favored  the  adjustment  of  disputes  as  to 
wages  and  working  conditions  by  boards  composed  of  repre- 
sentatives of  employers,  employees  and  the  public;  while  the 
brotherhoods  and  unions  of  railway  employees  championed 
the  continuance  of  national  boards  of  adjustment,  such  as  had 
been  set  up  during  the  period  of  government  operation  of  the 
railroads.  These  were  dual  boards  of  adjustment  composed  of 
an  equal  number  of  representatives  of  the  employees  and  the 
carriers,  there  being  no  members  of  the  public  on  the  boards. 
When  the  House  bill  was  under  consideration  by  the  House  of 
Representatives,  the  brotherhoods  secured  an  amendment,  sub- 
stituting their  general  plan  of  dealing  with  labor  disputes  in 
place  of  the  plan  recommended  by  the  Committee  on  Interstate 
and  Foreign  Commerce.  When  the  two  bills  came  under  con- 
sideration in  the  Conference  Committee  of  the  two  houses,  the 
House  conferees  prevailed.  The  representatives  of  the  Senate 
gave  up  the  plan  of  compulsory  arbitration  and  agreed  to  a 
plan  similar  to  the  one  that  originated  in  the  House  Committee 
on  Interstate  and  Foreign  Commerce. 

The  law  provides  that  the  carriers  and  their  employees  shall 
first  seek  by  direct  negotiation  to  agree  upon  wages  and  work- 
ing conditions.  If  such  negotiations  fail,  the  questions  as  to 
working  conditions,  not  as  to  wages,  may  be  considered  by 
boards  of  adjustment  created  for  a  single  railroad  company,  for 
a  section  of  the  country,  or  for  the  United  States  as  a  whole. 
These  boards  are  to  be  established  by  agreement  of  the  carriers 
and  employees.  They  are  to  be  dual  in  character  and  com- 
posed of  representatives  only  of  employers  and  employees.      In 


No.  3]  THE  PROBLEM  OF  RAILROAD  CONTROL  401 

case  a  board  of  adjustment  is  unable  to  settle  a  dispute  as  to 
working  conditions,  appeal  may  be  taken  to  the  Railroad  Labor 
Board  provided  for  by  the  Act.  This  board  is  composed  of 
nine  men,  appointed  by  the  President,  three  appointees  to  be 
from  nominees  made  by  the  employees'  organizations,  three 
from  nominees  made  by  the  railway  executives,  while  the  other 
three  are  to  be  such  representatives  of  the  public  as  the  Presi- 
dent may  select.  This  tripartite  board  has  jurisdiction  over 
disputes  as  to  wages  and  also  as  to  working  conditions.  It  was 
contemplated  by  the  statute  that  disputes  as  to  working  condi- 
tions should  go  before  the  Labor  Board  only  upon  appeal  from 
decisions  of  the  boards  of  adjustment,  but  inasmuch  as  the  car- 
riers and  the  employees  have  not  been  able  to  agree  upon  the 
kind  of  boards  of  adjustment  to  be  established,  such  boards 
have  not  been  brought  into  existence,  and  the  Railway  Labor 
Board  has,  in  fact,  decided  questions  of  working  conditions  as 
well  as  of  wages. 

Working  conditions,  other  than  in  the  train-operating  ser- 
vices, during  the  period  of  the  Railroad  Administration,  notably 
during  the  latter  days  of  that  period,  were  fixed  by  the  adop- 
tion of  national  agreements;  and,  after  the  railroads  were  re- 
turned to  their  owners,  the  labor  board,  being  confronted  with 
the  difficult  problem  of  deciding  what  increases  should  be  made 
in  railroad  wages,  announced  that  the  working  agreements  be- 
tween the  carriers  and  the  unions  should  remain  in  full  force 
until  changed  by  agreement  of  the  interested  parties.  The 
carriers  and  the  brotherhoods  could  not  agree  upon  modifica- 
tion of  the  national  agreements,  and  thus  early  in  1921  the 
labor  board  was  obliged  to  enter  upon  extended  hearings  to 
decide  whether  the  agreements  as  to  working  conditions  that 
had  been  adopted  during  the  period  of  government  operation 
should  be  continued,  modified,  or  abolished.  The  board  de- 
cided that  the  agreements  should  terminate  on  July  1,  1921,  if, 
in  the  meantime,  the  carriers  and  the  representatives  of  the 
employees  had  adopted  other  agreements,  but  as  the  carriers 
have  not  been  able  by  negotiation  to  modify  the  agreements, 
they  will  remain  in  force  until  the  labor  board  shall  have  sub- 
stituted new  agreements. 

The  effect  of  the  labor  provisions  of  the  Transportation  Act 
of  1920  has  been  to  place  in  the  hand  of  a  single  board  power 


402  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

to  determine  the  wages  of  all  railroad  employees  and  to  fix  the 
standards  of  working  conditions  prevailing  on  the  railroads 
throughout  the  states.  Moreover,  this  board  is  entirely  inde- 
pendent of  the  Interstate  Commerce  Commission.  The  Labor 
Board  controls  half  or  more  than  half  of  the  expenses  of 
the  railroad  companies,  while  the  Interstate  Commerce  Com- 
mission is  charged  with  the  duty  of  establishing  rates  that  will 
yield  the  carriers  what  the  statute  has  established  to  be  a  rea- 
sonable return  upon  railroad  property.  Whether  this  plan  of 
independent  action  on  the  part  of  two  boards,  one  determining 
expenses,  and  another  fixing  revenues,  will  work  successfully  is 
an  open  question. 

That  the  Transportation  Act  of  1920  is  a  genuinely  recon- 
structive measure  is  evidenced  by  the  provisions  it  contains  re- 
garding railway  services.  By  this  law  the  government  has 
undertaken  definitely  to  bring  about  better  service  conditions 
on  American  railroads.  Regulation  begins,  as  has  been  pointed 
out,  with  the  exercise  of  judgment  by  public  authority  as  to 
what  tracks  and  terminals  shall  be  constructed  and  how  capital 
shall  be  raised  for  such  construction  and  for  the  acquisition  of 
additional  facilities  and  equipment.  The  equipment  has  to  be 
operated  in  accordance  with  car-service  rules  determined  by  the 
government.  The  joint  use  of  terminals  may  be  required  ;  and, 
in  the  enforcement  of  the  Act,  the  carriers  will  be  required  so 
to  develop  their  terminals  as  gradually  to  bring  about  the  much- 
desired  unification  of  terminals  in  the  important  railroad  centers. 
Moreover,  the  interchange  of  traffic  by  railroads  and  waterways 
and  provisions  for  through-shipment  and  through-billing  by 
joint  rail-and-water  routes  are  definitely  provided  for. 

Developments  Since  Resumption  of  Corporate  Operation 

Whatever  merits  the  Transportation  Act  of  1920  may  pos- 
sess, and  it  is  unquestionably  a  constructive  measure  of  great 
promise,  a  series  of  events  has  prevented  the  law  from  accom- 
plishing what  it  was  hoped  might  be  brought  about.  The  law 
was  enacted  during  a  period  of  great  business  activity  that  fol- 
lowed the  close  of  hostilities ;  but,  before  the  law  had  been  in 
force  a  year,  the  United  States  was  suffering  along  with  other 
countries  from  a  world-wide  depression  in  business.  The 
plight  of  the  railroads  in  the  United  States  has  been  serious 


No.  3]  THE  PROBLEM  OF  RAILROAD  CONTROL  403 

since  the  beginning  of  1921,  and  there  is  no  promise  of  an  im- 
mediate and  prompt  return  to  prosperous  conditions. 

Several  important  actions  have  been  taken  by  the  govern- 
ment in  accordance  with  the  provisions  of  the  Act  of  1920. 
Shortly  after  the  Act  became  a  law,  there  developed  an  acute 
car  shortage  which  was  accentuated  in  April  and  May,  1920, 
by  the  so-called  "  outlaw-strike  "  of  yard-men  and  switch-men 
in  the  principal  railroad  terminals.  Although  this  strike  was 
of  short  duration  and  failed  utterly,  because  it  was  carried  on 
in  opposition  to  the  employees'  unions,  it  added  greatly  to  the 
difficulties  of  the  railroads.  In  order  to  meet  the  critical  situa- 
tion promptly  and  fully,  the  railroads  requested  the  Interstate 
Commerce  Commission  to  take  charge  of  car  service,  in  accord- 
ance with  the  powers  granted  the  Commission  by  the  Act  of 
1920.  The  Commission  decided  that  an  emergency  existed, 
and  for  several  months  it  exercised  as  full  control  over  car 
service  and  distribution  as  the  railroad  administration  had  ex- 
ercised during  the  period  of  government  operation.  Before  the 
end  of  the  year  1920  railroad  traffic  fell  off  sharply  and  the  car 
shortage  was  changed  into  a  car  surplus  which  has  prevailed 
thus  far  throughout  1921. 

The  depression  in  business  was  so  general  as  to  cause  a  large 
decrease  in  railroad  traffic  and  revenues.  The  decrease  in  the 
earnings  was  so  great  that  during  the  early  months  of  1921 
many  railways  in  the  United  States  had  recurring  operating  de- 
ficits, and  in  the  case  of  even  the  most  prosperous  railroads 
operating  expenses  were  nearly  equal  to  operating  revenue. 

This  financial  situation  developed  in  spite  of  the  fact  that  the 
Interstate  Commerce  Commission  in  August,  1920,  had  granted 
the  railroads  an  increase  in  rates  designed  to  enlarge  freight 
revenues  by  33  J/3  per  cent  and  passenger-train  revenues  by  about 
24  per  cent.  The  rates  authorized  by  the  Commission  in 
August,  1920,  were  based  upon  the  assumption  that  the  volume 
of  traffic  which  the  railroads  then  had  would  continue.  The 
members  of  the  Commission  were  no  prophets,  and  they  had 
no  means  of  foretelling  the  financial  depression.  It  came  within 
six  months  after  the  Commission's  rate  order  was  issued. 
Moreover,  the  increase  in  rates  granted  by  the  Commission  was 
made  with  a  view  to  enabling  the  carriers  to  earn  six  per  cent 
upon  a  tentative  value  which  the  Commission  placed  upon  the 


404  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

property  of  the  railroads  in  the  United  States,  subdivided  terri- 
torially among  the  four  districts  mentioned  above.  The  tenta- 
tive valuation  placed  upon  the  property  of  the  railroads  was 
$18,900,000,000.  This  was  undoubtedly  a  conservative  valua- 
tion. The  fact  that  the  total  value  fixed  by  the  Commission 
was  more  than  a  billion  and  a  half  dollars  less  than  the  book 
value  of  the  carriers'  property  may  not  have  much  significance, 
although  the  appraised  values  of  the  railroads,  in  so  far  as  they 
have  been  determined  by  the  Commission  under  the  valuation 
act  of  March  3,  1913,  indicate  that  the  physical  properties  of 
the  railroads  as  a  whole  will  be  quite  equal  to  the  amount  of 
the  assets  as  carried  on  the  books  of  the  companies.  In  any 
event,  rates  calculated  to  allow  the  carriers  as  a  whole  to  earn 
but  six  per  cent  per  annum  in  1920  and  1921,  upon  their  prop- 
erties valued  at  a  figure  which  they  had  reached  by  the  opening 
of  the  world  war,  would  necessarily  have  been  considered  con- 
servative, if  not  relatively  low,  even  had  business  conditions 
remained  prosperous,  as  was  anticipated  by  the  Commission 
when  the  rate  increase  was  authorized. 

Railroad  credit  was  not  restored.  It  is  clear  now  that  it 
would  have  been  impossible  in  1920  to  take  any  action  that 
would  have  exempted  the  railroads  from  sharing  with  other 
enterprises  in  the  consequences  of  the  world-wide  business  de- 
pression that  began  at  the  close  of  1920.  The  financial  and 
rate-making  features  of  the  Transportation  Act  of  1920  have 
had  comparatively  little  effect  because  the  benefits  they  might 
have  accomplished  have  been  overcome  by  adverse  economic 
conditions.  What  actually  happened  to  the  railroads  may  be  in- 
dicated by  a  few  figures  of  earnings  and  expenses. 

The  operating  revenues  during  the  calendar  year  1920  were 
$6,225,000,000,  and  exceeded  the  revenues  of  the  preceding 
year  by  $1,041,000,000,  but  the  outlay  of  the  railroads  for 
operating  expenses,  taxes  and  rents  in  1920  amounted  to 
$6,163,000,000,  and  was  greater  than  the  figures  for  1919,  by 
$1,495,000,000.  The  result  was  that  the  net  operating  in- 
come for  1920  was  but  $62,264,000,  whereas  in  1919  it  had 
been  $516,290,000.  Even  in  1919,  the  railway  operating  in- 
come was  only  about  five-ninths  of  the  amount  guaranteed  to 
the  railroads  by  the  government  during  the  period  of  federal 
control.     When  the  railroads  were  taken  over  by  the  govern- 


No.  3]  THE  PROBLEM  OF  RAILROAD  CONTROL  405 

ment  at  the  close  of  1919,  the  companies  were  guaranteed  a  net 
operating  income  equal  to  the  average  for  the  three  years  end- 
ing June  30,  1917.  This  guaranty  amounted  to  somewhat 
more  than  nine  hundred  million  dollars  per  annum.  The 
actual  net  operating  income  of  the  railroads  in  1920  was  thus 
about  one-fifteenth  of  the  average  for  the  three  years  pre- 
ceding the  entry  of  the  United  States  into  the  war. 

The  bad  financial  showing  of  the  railroads  for  the  years 
1919-20  (and  the  situation  was  even  worse  during  the  early 
months  of  1921)  was  caused  by  the  extraordinary  increase  in 
expenses  during  the  year  1920.  This  increase,  amounting  in 
all  to  nearly  a  billion  and  a  half  dollars,  was  made  up  of  the 
following  items :  increase  in  payments  for  wages  and  salaries 
$884,148,000,  for  locomotive  fuel  $196,429,000,  railroad  ties 
$28,113,000,  and  other  items  $386,682,000. 

The  situation  of  the  railroads  in  1920  in  comparison  with 
their  condition  in  1916  is  explained  by  the  fact  that  during  this 
five-year  period  the  revenues  increased  71  y-^j-  per  cent,  while 
total  expenses  rose  141Ty7  per  cent. 

What  Remains  to  be  Done 

The  foregoing  figures  are  sufficient  to  show  that  the  railroads 
can  be  restored  to  financial  stability  only  by  a  large  decrease  in 
expenses.  While  it  is  probable  that  with  the  return  of  business 
to  normal  conditions  there  will  be  an  increase  in  gross  revenue, 
yet  it  must  be  remembered  that  the  traffic  of  1920  was  heavy, 
much  larger  than  it  has  been  running  in  1921.  It  is  not  to  be 
anticipated  that  the  tonnage  of  the  railroads  in  the  near  future 
will  much  exceed  that  of  1920.  Moreover,  it  is  agreed  by 
everybody  that  railroad  revenues  cannot  be  increased  by  rais- 
ing freight  rates  and  passenger  fares.  Any  changes  made  in 
the  charges  must  be  downward.  In  fact,  numerous  individual 
rates  are  being  readjusted  downward  in  order  to  make  possible 
a  larger  and  freer  flow  of  certain  staple  commodities.  The 
future  success  of  the  railroads  clearly  depends  upon  greater 
economy  and  efficiency  and  upon  a  large  reduction  in  the  ratio 
of  expenses  to  income. 

Something  has  already  been  done  to  reduce  expenses.  The 
Railroad  Labor  Board  by  an  order  effective  July  1,  1921,  has 
reduced  wages  about  twelve  per  cent.    Some  railroad  companies 


406  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

by  their  own  action  have  reduced  salaries.  A  twelve-per-cent 
reduction  in  salaries  and  wages  paid  in  1920  will  amount  to 
more  than  four  hundred  million  dollars.  Savings  of  an  equal 
amount  in  other  expenses  must  be  made  in  order  to  put  the 
railroads  securely  upon  their  feet.  Presumably  the  cost  of 
coal,  fuel-oil,  ties,  rails,  equipment  and  supplies  will  follow  the 
downward  trend  of  prices  generally,  but  it  is  not  to  be  expected 
that  large  reductions  can  be  secured  in  the  costs  of  material 
and  equipment  in  the  near  future.  Hope  must  be  placed  in 
the  introduction  of  operating  economies.  The  carriers,  federal 
and  state  commissions,  and  the  public  must  unite  in  efforts  to 
reduce  the  terminal  expenses  and  to  bring  about  the  maximum 
use  of  equipment  and  facilities.  In  the  long  run,  railway  co- 
operation and  consolidations  will  make  many  economies  pos- 
sible, but  during  the  next  five  years  the  greatest  opportunity 
for  a  reduction  in  railroad  expenses  will  be  found  in  the  intro- 
duction of  economical  methods  of  handling  traffic  into,  out  of, 
and  through  large  city  terminals. 

It  is  to  be  hoped  that  it  will  not  be  necessary  for  the  govern- 
ment to  make  large  additional  advances  of  funds  to  the  rail- 
roads, but  there  is  a  financial  measure  by  which  the  govern- 
ment might  promptly  be  of  much  assistance  to  the  railroads. 
During  the  period  of  government  operation  some  seven  hun- 
dred or  eight  hundred  million  dollars  were  invested  by  the 
government  in  improvements  and  betterments.  Had  these  in- 
vestments been  made  by  the  railroad  companies,  the  funds 
would  have  been  secured  by  the  sale  of  securities.  They  would 
have  been  funded  obligations.  The  government  has,  however, 
withheld  this  large  sum  of  money  from  the  railroads  in  settling 
its  obligations  to  the  railroads.  In  other  words,  the  govern- 
ment has  credited  itself  with  this  "sum  of  money,  and  thus  has 
withheld  it  from  the  railroads.  Valuable  temporary  assist- 
ance would  be  given  to  the  carriers,  were  the  government  to 
fund  this  investment  of  seven  or  eight  hundred  millions  and 
advance  the  cash  to  the  companies. 

It  is  doubtless  too  early  to  pass  final  judgment  upon  the  plan 
of  adjusting  wages  and  working  conditions  established  by  the 
Transportation  Act  of  1920.  The  labor  problem  is  a  compli- 
cated one  at  all  times,  and  under  present  conditions  of  business 
depression,   and  of  consequent  unemployment  and   unrest  on 


No.  3]  THE  PROBLEM  OF  RAILROAD  CONTROL  407 

the  part  of  workingmen,  the  problem  is  more  than  ordinarily 
difficult.  The  continuance  of  the  national  agreements  entered 
into  by  the  railroad  administration  and  the  railroad  brother- 
hoods, other  than  those  of  which  the  train  operators  are  mem- 
bers, and  the  inability  of  the  railroad  companies  to  agree  with 
the  employees'  unions  as  to  the  kind  of  boards  of  adjustment 
to  be  set  up  under  the  Act  of  1920,  have  resulted,  as  stated 
above,  in  placing  the  whole  problem  of  adjusting  the  wages  and 
working  conditions  of  railroad  employees  in  the  hands  of  the 
Railroad  Labor  Board.  The  direct  negotiation  of  railroad  em- 
ployers and  employees,  outside  of  the  train  services,  has'  been 
minimized  and  practically  set  aside.  A  national  board,  one- 
third  of  the  membership  of  which  is  made  up  of  representatives 
of  the  public,  is  fixing  wages,  and  thus  for  the  present  is  de- 
termining six-tenths  of  the  expenses  of  the  railroads  and  is  fix- 
ing the  rules  controlling  working  conditions  throughout  the 
country. 

It  is  doubtful  whether  the  Railroad  Labor  Board  will  prove 
to  be  a  satisfactory  agency.  I  am  aware  that  the  tendency,  not 
only  in  the  United  States,  but  in  other  countries,  is  toward  the 
establishment  of  wages  and  working  conditions  by  national 
boards  instead  of  by  direct  negotiation  of  employers  with  em- 
ployees. Nevertheless,  I  am  not  convinced  that  the  tendency 
is  in  the  right  direction  or  that  the  tendency  will  permanently 
continue.  It  may  still  be  that  experience  will  demonstrate  the 
wisdom  of  returning  to  the  policy  of  establishing  wages  and 
working  conditions  by  contract,  by  negotiation  and  agreement 
of  the  parties  directly  interested.  If  the  task  is  to  be  taken 
from  those  directly  concerned  and  placed  with  a  board,  prob- 
ably that  board  should  be  made  up  only  of  representatives  of 
the  public.  Moreover,  it  should  surely  be  a  board  to  which 
cases  come  only  upon  appeal,  either  upon  appeal  by  the  em- 
ployers and  employees  when  negotiations  have  failed,  or  upon 
their  appeal  from  the  decision  of  some  local  arbitration  or  ad- 
justment board,  which  has  first  considered  and  passed  upon  the 
questions  at  issue. 

If  this  opinion,  here  tentatively  expressed,  should  prove  to 
be  sound,  an  amendment  to  the  Transportation  Act  of  1920 
will  be  found  to  be  necessary. 

Of  one  thing  I  am  quite  certain.     The  railroad  systems  of 


408  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

the  United  States  must  be  brought  together  into  a  limited  num- 
ber of  permanent  systems  of  relatively  equal  traffic  possibilities 
and  financial  strength.  During  the  next  few  years,  the  rail- 
roads will  be  given  an  opportunity  to  consolidate  by  voluntary 
action,  in  accordance  with  a  general  plan  of  railroad  grouping 
determined  and  promulgated  by  the  Interstate  Commerce  Com- 
mission. The  present  unfortunate  financial  condition  of  the 
railroads  will  necessarily  cause  the  process  of  consolidation  to 
be  slow,  and  it  is  by  no  means  certain  that  even  when  the  rail- 
roads regain  their  normal  financial  strength  they  will  be  dis- 
posed to  work  out  the  consolidations  found  by  the  Interstate 
Commerce  Commission  to  be  in  the  public  interest.  Doubtless 
Senator  Albert  B.  Cummins,  Chairman  of  the  Senate  Commit- 
tee on  Interstate  Commerce,  is  correct  in  believing  that  Con- 
gress will  have  to  pass  a  law  compelling  the  railroads  to  con- 
solidate. As  he  stated  in  the  Senate,  in  debating  the  bill  that 
later  became  the  Transportation  Act  of  1920, 

It  has  been  utterly  impossible  for  any  body  of  men  to  make  a  system 
of  rates  that  will  sustain  the  weaker  railroads  of  the  country,  without 
giving  the  stronger  railroads  an  income  excessive  and  intolerable  in 
its  extent;  and  there  lies  the  great  fundamental  obstacle  in  our  system 
of  rate-making.  The  Interstate  Commerce  Commission  can  no  more 
give  to  each  railway  of  the  United  States  the  return  to  which  it  is 
fairly  entitled  than  it  can  annihilate  distance  or  overcome  any  other 
law  of  nature.  ...  It  was  obvious,  I  think,  to  the  students  of  the  sub- 
ject long  before  the  government  took  possession  that  we  must  adopt 
some  plan  that  would  remove  this  inherent  fundamental  difficulty. 

The  Senate  bill  contemplated  such  a  grouping  of  railroads  as 
would  maintain  inter-system  competition ;  and  it  was  provided 
that  the  capitalization  of  the  consolidated  systems  should  cor- 
respond to  the  actual  value  of  the  properties  brought  together. 

The  obstacles  to  be  overcome  in  bringing  about  the  con- 
solidation of  American  railroad*  in  the  manner  just  suggested 
are  probably  greater  than  can  be  overcome  by  voluntary  action 
of  the  carriers.  Experience  will  probably  show  the  necessity 
for  the  amendment  of  the  Act  of  1920  so  as  to  provide  that 
after  a  period  of  five  or  seven  years  the  carriers  shall  be  com- 
pelled to  consolidate,  in  accordance  with  the  plan  adopted  by 
the  Interstate  Commerce  Commission.  For  the  next  year  or 
two,  the  country  will  note  what  progress  is  made  by  voluntary 
action,  and  will  then  decide  whether  compulsion  is  necessary  to 
bring  about  consolidation. 


No.  3]  THE  PROBLEM  OF  RAILROAD  CONTROL  409 

Along  with  the  consolidation  of  railroads,  whether  by  volun- 
tary action  or  by  compulsion  of  the  government,  should  come 
the  federal  incorporation  of  the  railroads.  A  law  for  the 
federal  incorporation  of  the  railroads  should  have  been  included 
in  the  Transportation  Act  of  1920.  The  draft  of  such  a  law 
was  included  in  the  bill  prepared  by  the  National  Transporta- 
tion Conference  that  was  convened  by  the  Chamber  of  Com- 
merce of  the  United  States.  It  was  a  simple  comprehensive 
plan  of  incorporation.  This  or  some  similar  plan  should  re- 
ceive early  consideration  by  Congress. 

There  remains  a  question  concerning  which  there  is  much 
difference  of  opinion.  Should  the  administrative  regulation  of 
the  railroads,  as  well  as  the  determination  of  rates  and  revenues, 
and  the  exercise  of  the  functions  closely  related  to  rates  and 
revenues,  be  vested  solely  in  the  Interstate  Commerce  Commis- 
sion, or  should  a  separation  be  made  of  the  executive  and  semi- 
judicial  tasks  of  regulation,  and  the  acticities  of  the  Interstate 
Commerce  Commission  be  confined  to  those  of  a  semi-judicial 
character?  I  have  elsewhere  stated  the  reasons  why  a  federal 
transportation  board  should  be  created,  and  what  its  functions 
should  be.1  It  should  not  be  forgotten  "  that  the  success  of 
the  whole  venture  of  regulation  of  the  railroads  must  neces- 
sarily hinge  largely  upon  the  machinery  that  is  provided  to  give 
effect  to  the  laws  that  may  be  enacted."  The  Interstate  Com- 
merce Commission  has  functioned  successfully  for  the  purposes 
for  which  it  was  created.  It  is,  however,  too  large  a  body,  and 
is  by  temperament  and  method  too  judicial  in  its  practices,  to 
be  a  highly  efficient  executive  board. 

Successive  statutes  have  increased  the  membership  of  the 
Interstate  Commerce  Commission  from  five  to  seven,  to  nine, 
and  now  to  eleven  members,  and  with  the  increase  in  member- 
ship there  has  been  a  multiplication  in  the  executive  tasks  to  be 
performed.  Will  it  not  be  wise  for  Congress,  when  it  again 
gives  consideration  to  railroad  legislation,  to  reduce  the  mem- 
bership of  the  Interstate  Commerce  Commission  to  seven  men 
and  to  limit  its  activities  to  the  regulation  of  the  rates  and 
revenues  of  the  carriers  and  the  administration  of  the  bureaus 

1  See  Proceedings  of  the  Academy  of  Political  Science,  vol.  viii,  pp. 
572-574;  also  Program  of  Railroad  Legislation,  pp.  49-56  (this  volume 
was  published  by  the  Chamber  of  Commerce  of  the  United  States, 
Washington,  D.  C). 


410  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

necessarily  associated  with  this  task.  If  this  is  done,  the  ex- 
ecutive functions  of  regulation  as  they  have  developed  to  date, 
and  as  they  will  be  increased  in  the  future,  might  well  be  en- 
trusted to  a  board  of  five  or  preferably  three  members,  execu- 
tive in  practice  and  organization,  and  of  maximum  administra- 
tive efficiency. 

In  general,  the  government  regulation  or  control  of  the  rail- 
roads is  a  problem  of  securing  for  the  country  a  system  of  rail- 
road transportation  adequate  to  the  demands  upon  it  and  at  all 
times  progressively  efficient.  The  railroads,  the  waterways  and 
the  highways  should  develop  simultaneously,  and  they  should 
be  so  coordinated  that  they  will  together  form  a  physically 
unified  transportation  system.  The  government's  task  is  largely 
executive  as  well  as  semi-judicial.  For  these  reasons,  it  is 
probable  that  experience  will  demonstrate  the  necessity  of 
amending  the  Transportation  Act  of  1920  by  a  law  creating  a 
transportation  board  entrusted  with  the  executive  task  of  the 
government  regulation  of  the  railroads. 


PROCEEDINGS 
OF  THE  ACADEMY  OF  POLITICAL  SCIENCE 


The  Proceedings  have  been  issued  regularly  by  the  Academy  since  iyio  as  a  record 
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No.  4.  Organization  for  Social  Work,  23b  pp.  (July  1912)  31.50 
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PRACTICAL  TESTS  OF  THE 
TRANSPORTATION  ACT 


BY 

A.  M.  SAKOLSKI 


REPRINTED  FROM  POLITICAL  SCIENCE  QUARTERLY 
Vol.  XXXVI,  No.  3,  Skptkmbkr,  1921 


NEW  YORK 

PUBLISHED  BY  THE 

ACADEMY  OF  POLITICAL  SCIENCE 

1921 


PRACTICAL  TESTS  OF  THE  TRANSPORTATION  ACT  * 

I 

THE  Transportation  Act  of  1920  has  been  generally  re- 
garded as  the  most  constructive  congressional  legisla- 
tion in  recent  times.  Its  direct  aim  was  to  solve  certain 
complicated  railroad  problems  that  had  been  growing  in  size 
and  in  importance  for  over  a  quarter-century.  These  problems 
became  acute  at  the  time  the  government  took  over  the  opera- 
tion of  the  roads  as  a  war  measure,  and  it  was  generally  apparent 
that  the  railroad  properties  could  not  be  safely  returned  to  their 
owners  unless  an  honest  legislative  attempt  was  made  to  elimin- 
ate the  accumulated  difficulties  of  both  the  pre-war  and  the  war 
periods.  How  far  Congress  succeeded  in  accomplishing  this 
end  by  the  Transportation  Act  and  what  further  adjustments 
are  desirable,  are  the  subjects  of  this  paper. 

The  practical  and  permanent  features  of  the  Transportation 
Act  of  1920  may  be  summarized  as  follows: 

First,  it  proposes  to  adjust  railroad  rates  so  that  the  carriers 
at  all  times  shall  be  permitted  to  earn  a  reasonable  return  on 
the  fair  value  of  their  property. 

Secondly,  it  proposes  to  eliminate  state  interference  with  rail- 
road rates  and  railroad  financial  policies. 

Lastly,  it  aims  to  relieve  the  carriers  from  the  incubus  of  per- 
ennial labor  demands  and  union  domination. 

Let  us  see  to  what  extent  these  admirable  objects  have  been 
obtained.  _ 

1  In  view  of  the  unusual  interest  attaching  at  the  present  time  to  the  problem  of 
governmental  control  of  public  utilities,  it  has  been  deemed  valuable  to  offer  the 
readers  of  the  Political  Science  Quarterly  in  this  issue  two  articles  dealing  with 
the  question  from  different  points  of  view.  Both  Dr.  Sakolski,  of  New  York  Uni- 
versity, and  Professor  Johnson,  Dean  of  the  Wharton  School  of  Finance  and  Com- 
merce, are  scholarly  specialists  in  the  field  of  railroad  economics.  The  editors,  in 
conformity  with  their  general  policy,  assume  no  responsibility  for  the  opinions  ex- 
pressed or  the  recommendations  advanced  by  the  authors. — Ed. 

376 


PRACTICAL  TESTS  OF  THE  TRANSPORTATION  ACT      377 

As  a  means  of  rate  adjustment  the  new  railroad  act  provides : 

In  the  exercise  of  its  power  to  prescribe  just  and  reasonable  rates, 
the  Commission  shall  initiate,  modify,  establish  or  adjust  such  rates  so 
that  carriers  as  a  whole  (or  as  a  whole  in  each  of  such  groups  or  terri- 
tories as  the  Commission  may  from  time  to  time  designate)  will,  under 
honest,  efficient  and  economical  management  and  reasonable  expendi- 
tures for  maintenance  of  way,  structures  and  equipment,  earn  an 
aggregate  annual  net  railway  operating  income  equal,  as  nearly  as  may 
be,  to  a  fair  return  upon  the  aggregate  value  of  the  railway  property  of 
such  carriers  held  for  and  used  in  the  services  of  transportation. 

Incidentally,  it  should  be  remarked  that  this  provision,  re- 
garded as  the  most  important  in  the  whole  law,  adds  nothing 
new  in  theory  or  fact.  Under  the  law,  public  utilities  are  en- 
titled to  charge  rates  that  give  "  a  reasonable  return  on  the 
value  of  their  property".  The  perpetual  difficulty  has  been  to 
define  clearly  "reasonable  return"  and  "fair  value".  For 
almost  a  decade  the  Commission  under  the  valuation  section  of 
the  Interstate  Commerce  Act  has  been  endeavoring  to  estab- 
lish a  basis  of  fair  value.  No  definite  policy  has  been  adopted, 
nor  is  one  likely  to  be  finally  and  conclusively  adopted  until 
after  years  of  litigation.  In  the  rate  testimony  before  the  Com- 
mission the  railroads  presented  the  aggregate  of  their  invest- 
ment accounts  as  a  basis  of  property  value.  In  support  of  this 
data  they  exhibited  figures  of  "  tentative "  valuations  of  fifty 
railroad  properties  obtained  from  the  Commission's  valuation 
department,  showing  that  in  the  aggregate  the  values  as  "  tenta- 
tively" reported  were  not  very  different  from  the  aggregate  of 
the  companies'  capitalization.  The  Commission  seems  to  have 
seized  on  this  point  as  a  "safe  way  out",  for  in  the  decision 
wherein  the  railroads  were  given  an  aggregate  valuation  of 
$18,900,000,000  (against  a  property  investment  account  of 
$20,040,572,611)  it  is  stated  that  "so  far  as  the  work  [of 
valuation]  has  produced  results,  either  as  to  particular  roads  or 
as  showing  general  tendencies  or  principles,  we  have  given  con- 
sideration thereto". 

The  Interstate  Commerce  Commission,  knowing  the  responsi- 
bility placed  upon  it  by  the  Transportation  Act  of   1920,  un- 


37g  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

doubtedly  was  intent  on  carrying  out  the  letter  of  the  law.  The 
rate-making  section  of  the  Act  explicitly  states  that  the  Com- 
mission when  determining  the  aggregate  value  of  railroad  prop- 
erty "  shall  give  due  consideration  to  all  the  elements  of  value 
recognized  by  the  law  of  the  land  for  rate-making  purposes  and 
shall  give  to  the  property  investment  account  of  the  carriers 
only  that  consideration  which  under  such  law  it  is  entitled  to  in 
establishing  values  for  rate-making  purposes."  Accordingly 
some  method  of  establishing  railroad  value  other  than  mere 
reference  to  the  investment  account  is  required  before  a  sound 
basis  of  rate-making  can  be  adopted. 

Nevertheless  the  questions  of  valuation  and  adequate  rates 
are  of  immediate  importance  under  the  provisions  of  the  Trans- 
portation Act,  since,  after  having  increased  freight  and  passenger 
rates  to  an  extent  which  was  confidently  believed  to  furnish 
revenues  that  would  result  in  the  maximum  statutory  net  return 
on  property  investment,  the  railroads  have  been  experiencing 
the  lowest  scale  of  net  earnings  in  their  history.  However,  un- 
foreseen circumstances  which  have  arisen  since  the  passage  of  the 
Act  have  made  the  rate-making  provisions  difficult  of  practical 
application. 

In  the  first  place  the  volume  of  traffic  of  all  kinds  due  to 
widespread  and  almost  universal  business  depression  fell  off 
abruptly  to  an  abnormally  low  amount.  Secondly,  the  wastes 
and  inefficiency  resulting  from  government  operation  combined 
with  the  higher  wages  and  the  restrictive  labor  regulations  en- 
forced by  the  Railroad  Labor  Board  enlarged  operating  ex- 
penses beyond  a  point  of  financial  endurance.  Consequently, 
when  the  special  session  of  Congress  convened  in  the  spring  of 
1 92 1  serious  and  widespread  concern  prevailed  regarding  the 
railroads'  financial  stability.  As  a  further  complication,  ship- 
pers began  to  complain  of  excessive  charges  under  the  new 
scale  of  rates,  so  that  congressmen  found  themselves  bombarded 
by  petitions  and  complaints.  Farmers,  manufacturers,  export- 
ers, jobbers,  commercial  salesmen  and  others,  all  feeling  the 
effects  of  the  general  business  depression,  naturally  laid  much  of 
the  blame  on  the  increased  transportation  charges.  Railroad 
security-holders,  likewise,  held  up  their  hands  in  supplication 


No.  3]       PRACTICAL  TESTS  OF  THE  TRANSPORTATION  ACT      379 

for  relief.  They  feared  that  the  growing  political  pressure  in 
favor  of  reduced  railroad  rates  would  have  a  most  deleterious 
effect  in  decreasing  the  earnings  of  their  investments  in  rail- 
road properties. 

It  should  be  borne  in  mind  that  the  rate  provisions  of  the 
Transportation  Act  were  essential  at  the  time  to  stabilize  rail- 
road credit.  The  roads  under  government  operation  had  exhib- 
ited such  poor  net  returns  that  some  sort  of  guaranty  that  higher 
earnings  would  result  under  private  operation  was  required  to 
prevent  a  disastrous  slump  in  railroad  securities.  Congress  was 
made  to  realize  the  situation.  The  result  was  a  crovernment 
guaranty  of  earnings  during  six  months  following  return  to 
private  operation,  and  thereafter  the  statutory  minimum  return 
to  be  secured  by  higher  rates.  Nothing  in  the  rate  provisions  of 
the  Transportation  Act,  however,  requires  parallel  increases  or 
decreases  in  all  freight  or  passenger  charges  to  produce  the 
statutory  return  on  investment.  The  practical  error  of  the  In- 
terstate Commerce  Commission  in  carrying  out  the  law  was  its 
crude  method  of  indiscriminately  making  general  rate  increases. 
The  resulting  maladjustments  must  in  every  case  be  ironed  out 
by  further  rate  hearings  and  investigations.  Unfortunately  there 
has  not  yet  been  developed  an  agency  which  possesses  adequate 
data  as  to  the  relation  of  freight  rates  to  manufacturing  costs  or 
to  the  prices  of  commodities  at  points  of  ultimate  consumption. 
Such  information,  scientifically  assembled,  to  inform  shippers 
and  the  public  of  the  relation  of  railroad  rates  to  commerce  and 
living  costs,  is  highly  desirable.  A  cooperative  organization  of 
carriers  would  be  the  proper  agency  through  which  this  in- 
formation could  be  supplied,  but  no  organization  having  author- 
ity over  these  subjects  exists  whose  conclusions  or  suggestions 
could  be  generally  accepted.  Moreover  small  progress  as  yet 
has  been  made  in  scientific  freight-rate  adjustments  from  the 
standpoint  of  basic  principles.  Results  of  past  experiences  and 
the  desire  to  maintain  regional  competition  have  been  the  chief 
factors  in  creating  present  freight-rate  structures.  The  public 
is  forced  to  rely  upon  governmental  agencies  to  define  and 
apply  the  principles  which  should  originate  with  those  who  are 
conducting  transportation. 


380  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVr 

Railroad  rate-making  is  an  extremely  delicate  and  difficult 
task,  so  that  when  a  scale  of  charges  covering  the  many  groups 
and  kinds  of  commodities  is  once  established,  railroad  traffic 
officials  are  loath  to  make  adjustments  demanded  by  changes 
in  competitive  forces  or  in  business  conditions.  This  rate 
rigidity  cannot  be  easily  altered  under  the  new  powers  of  the 
Interstate  Commerce  Commission,  since,  in  order  to  create  the 
conditions  leading  to  the  practical  application  of  the  "  rate- 
making  rule  ",  the  Commission,  in  addition  to  controlling  without 
interference  every  detail  of  railroad  policy,  must  provide  rate 
zones  that  will  tend  to  maintain  sectional  economic  and  com- 
petitive conditions,  and,  at  the  same  time,  must  furnish  financial 
stability  to  the  carriers.  To  accomplish  all  this  without  serious 
sectional  and  political  controversies,  seems  almost  impossible. 

Hardly  less  glaring  than  the  difficult  application  of  the  "  rate- 
making  rule"  to  bring  immediately  an  adequate  income  on 
investment,  is  the  ineffectiveness  thus  far  of  the  provisions  for 
the  elimination  or  nullification  of  state  and  local  interference 
with  railroad  activities.  Restrictive  and  punitive  state  railroad 
legislation  prior  to  the  war  had  grown  with  such  cumulative 
intensity,  that  the  railroads  in  191 6  joined  in  a  concerted  move- 
ment for  an  entire  new  scheme  of  railroad  control,  whereby  the 
companies  would  be  relieved  of  the  vexatious  state  interferences 
and  political  railroad-baiting.  All  told,  between  191 2  and  191 5, 
it  was  computed  that  upward  of  4,000  bills  affecting  railroads 
were  introduced  into  the  national  and  state  legislatures,  of  which 
440  became  laws.  Whatever  the  purpose  of  these  laws,  there 
was  almost  always  a  certain  result,  viz.,  increase  in  operating 
costs.  The  full-crew  laws  have  been  extremely  costly :  the  law 
of  small  New  Jersey  alone  added"an  operating  cost  of  something 
like  $400,000  annually.  Hence  it  is  with  deep  satisfaction  that 
one  may  look  upon  the  provisions  of  the  recent  Federal  law 
which  vest  exclusively  in  the  Interstate  Commerce  Commission 
regulatory  functions  formerly  exercised  in  common  with  or  ex- 
clusively by  the  states.  The  conflict  between  Federal  and  state 
authority  began  immediately  after  the  grant  of  increased  rates 
by  the  Interstate  Commerce  Commission.  Most  of  the  state 
public   utility   commissions    refused   to   sanction   proportionate 


No.  3]      PRACTICAL  TESTS  OF  THE  TRANSPORTATION  ACT      381 

intra-state  rate  increases  and  have  carried  their  opposition  into 
the  courts.  The  litigation  is  still  pending,  so  that  a  series  of 
new  Supreme  Court  decisions  similar  to  the  Shreveport  and  the 
Minnesota  Rate  Cases  is  awaited  before  the  validity  of  the 
Interstate  Commerce  Commission's  supreme  rate-making  power 
conferred  by  the  Transportation  Act  is  finally  determined. 

The  grant  of  exclusive  financial  control  to  the  Interstate 
Commerce  Commission  is  likewise  opposed  as  unconstitutional, 
by  several  of  the  states,  though  in  this  matter  the  opposition  is 
not  persistent,  and  is  likely  soon  to  disappear  altogether. 

The  labor  sections  of  the  Transportation  Act  are  likewise 
undergoing  a  serious  test.  The  results  thus  far  have  been  dis- 
appointing. As  a  means  of  settlement  of  the  railroad  labor 
problem,  the  new  legislation  is  but  a  step  toward  a  much-desired 
end.  The  measure,  as  finally  enacted,  however,  does  not  amply 
protect  the  public  or  the  railroads  against  the  strike  evil.  It 
merely  makes  provision  for  a  system  of  regional  labor  boards 
of  adjustment,  which,  in  a  more  or  less  haphazard  way,  had 
existed  previous  to  government  railroad  operation.  A  national 
labor  board  of  appeal,  composed  equally  of  representatives  of 
employees,  of  the  railroads,  and  the  public,  all  appointed  by 
the  President,  was  created  with  power  both  to  hear  and  determine 
-disputes  and  to  initiate  investigations.  The  decisions  of  this 
National  Board  are  not  enforced  by  penal  provisions.  In  view 
of  the  inability  of  previous  national  labor-adjustment  boards  to 
settle  railroad  labor  disputes  satisfactorily,  it  may  be  assumed 
that  the  public  is  not  yet  amply  protected  from  railroad  labor 
disturbances. 

Thus  far  the  labor  adjustments  formulated  by  the  National 
Labor  Board  have  not  brought  satisfaction  to  either  the  em- 
ployees or  the  employers.  After  the  return  to  private  operation, 
the  railroads  naturally  sought  relief  from  the  national  labor 
agreements  and  other  concessions  to  labor  made  by  the  Railroad 
Administration.  These  agreements,  which  covered  the  shop 
crafts  as  well  as  train  operatives,  proved  exceedingly  costly  and 
in  accordance  with  the  claims  of  railroad  officials,  constituted  a 
large  factor  in  producing  the   abnormally  high   operating  ex- 


3 32  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

penses.  The  national  agreements  are  opposed  by  the  carriers 
chiefly  for  two  reasons.  First,  they  create  a  universal  yardstick 
to  which  all  carriers  regardless  of  peculiar  and  widely  varying 
operative  and  financial  conditions  must  conform.  Secondly, 
they  "  unionize  "  all  railroad  labor,  including  shop  employees, 
many  crafts  of  which  had  formerly  worked  under  local  regula- 
tions and  had  not'  the  support  of  powerful  national  organizations. 
After  the  return  to  private  operation,  it  was  argued  by  the 
carriers  that  the  national  labor  agreements  were  in  reality  not 
incumbent  upon  the  railroad  companies,  since  the  companies 
were  never  parties  to  the  contract.  The  railroads  contended, 
moreover,  that  neither  the  Constitution  nor  any  statute  empowers 
Congress  to  compel  employment  of  adult  male  labor  in  private 
occupations  at  a  fixed  wage  rate. 

After  extended  hearings  in  which  both  railroad  officials  and 
employees  took  part,  the  Railroad  Labor  Board  formally  set 
aside  the  national  agreements.  The  Board's  decision,  however, 
sets  up  certain  rulings  in  relation  to  railroad  labor  which  are 
causing  serious  difficulties.  The  decision  enforces  "  system " 
collective  bargaining  and  establishes  the  rule  that  in  local  dis- 
putes and  arbitrations  "the  majority  of  each  craft  or  class  of 
employees  shall  have  the  right  to  determine  what  organization 
shall  represent  members  of  such  craft  or  class".  The  effect  of 
this  is  likely  to  establish  unionism  on  a  national  basis  in  all  rail- 
road crafts,  since  in  view  of  the  fact  that  local  craft  unions  are 
under  the  jurisdiction  and  control  of  the  national  labor  organ- 
izations, national  uniform  standards  can  readily  be  set  up  and 
again  enforced. 

For  years,  the  leading  railroads,  in  dealing  with  their  em- 
ployees in  certain  crafts  (particularly  shop  employees)  have  ad- 
hered to  the  "  open  shop  "  principle.  They  have  accordingly 
retained  both  union  and  non-union  employees  and  if  union 
wages  and  working  conditions  were  adopted,  they  were  not  en- 
forced as  the  outcome  of  direct  agreements  with  the  national 
labor  organization,  but  were  set  up  merely  as  each  individual 
company's  own  "  shop  rules  ".  It  is  only  by  this  plan  that  the 
railroads  can  avoid  domination  by  the  national  labor  organiza- 
tions in  establishing  wages  and  working  conditions  among  their 


No.  3]       PRACTICAL  TESTS  OF  THE  TRANSPORTATION  ACT      383 

employees.  The  threatened  destruction  of  the  "  open  shop " 
principle  by  the  Labor  Board  may  mean  a  continuation  of  a 
uniform  national  standardized  wage  scale  and  working  condi- 
tions for  railroad  labor  in  all  sections,  regardless  of  differences 
in  the  operating  problems  and  the  financial  conditions  of  indi- 
vidual companies. 

The  dispute  of  the  Pennsylvania  Railroad  with  the  National 
Labor  Board  illustrates  the  difficulties  in  the  settlement  of  rail- 
road labor  disputes  under  the  provisions  of  the  Transportation 
Act.  The  Pennsylvania  Railroad  in  accordance  with  its  old-time 
practice,  made  arrangements  with  its  employees  concerning 
working  conditions  and  the  settlement  of  disputes.  The  Labor 
Board  has  ordered  these  arrangements  set  aside  on  the  ground 
that  the  company  had  no  legal  authority  to  divide  its  system 
into  regions  and  require  the  employees  to  elect  regional  repre- 
sentatives. They  also  ruled  that  the  election  of  employees' 
representatives  should  be  by  open  and  not  by  secret  ballot. 
The  railroad  company's  officials  maintain  that  unless  the  regional 
method  of  establishing  wages  and  working  conditions  as  con- 
trasted with  the  "  system  "  plan  covering  all  the  company's  lines 
is  maintained,  the  same  conditions  will  prevail  as  existed  under 
the  recently  abolished  national  agreements. 

II 

In  view  of  the  present  difficulties  in  the  railroad  situation  the 
question  is  naturally  asked,  "Is  the  Transportation  Act  of  1920 
a  failure?"  Any  answer  must  take  into  consideration  present 
political  and  economic  conditions  in  reference  to  the  various 
provisions  of  the  law.  As  a  piece  of  legislation,  the  Act  is  too 
far-reaching  in  its  proposed  remedies  and  regulations  to  merit 
at  this  time  general  condemnation.  This  is  essentially  the  con- 
clusion drawn  from  the  hearings  before  the  Senate  Committee 
on  Interstate  Commerce.  The  Senate  inquiry  has  two  prime 
purposes,  viz. :  ( I )  to  ascertain  the  causes  of  high  railroad  oper- 
ating costs,  and  (2)  to  estimate  the  effect  of  the  increased 
freight  rates  on  both  the  carriers  and  the  shippers.  There  has 
been  nothing  in  the  investigation  suggesting  railroad  national- 
ization or  a  return  to  government  railroad  operation. 


384  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

The  causes  of  the  high  operating  costs  appear  to  have  been 
the  most  pertinent  part  of  the  inquiry.  Adequate  data  regard- 
ing the  direct  or  indirect  effect  of  general  rate  increases  on 
railroad  traffic  or  on  the  general  business  of  the  country  are 
lacking.  As  already  pointed  out,  neither  the  government  nor 
the  railroads  have  any  research  organization  which  has  this 
information  at  hand.  Consequently  the  only  evidence  of  the 
effect  of  the  higher  rates  on  traffic  that  has  been  thus  far  pre- 
sented to  the  committee  has  been  in  the  form  of  personal  opin- 
ions, guesses  and  biased  deductions.  As  a  result  of  the  wide- 
spread business  depression  various  groups  of  shippers  and  pro- 
ducers have  been  exerting  political  pressure  to  have  rates  on 
their  particular  commodities  reduced  in  order  to  promote  their 
own  peculiar  interests,  regardless  of  the  effect  thereof  on  gen- 
eral welfare  or  on  railroad  income.  Thus,  eastern  grain  rates 
were  reduced  early  in  August  twenty-five  per  cent  for  a  period 
extending  to  the  end  of  192 1  in  the  belief  that  this  action  would 
promote  the  export  grain  movement  and  aid  the  western  agri- 
cultural sections.  Reductions  of  rates  on  building  materials, 
iron  and  coal  products  are  also  likely  to  be  put  into  effect.  The 
adjustment  of  freight  rates  to  favor  certain  classes  of  producers 
is  a  "  robbing  Peter  to  pay  Paul"  policy  that  may  have  serious 
disturbing  effects  on  general  business. 

The  attitude  toward  the  Transportation  Act  assumed  by  the 
railway  executives  at  the  Senate  hearings  is  indicated  in  the 
statement  of  Mr.  Thomas  De  Witt  Cuyler,  Chairman  of  the  As- 
sociation of  Railway  Executives.  This  statement  makes  it  plain 
that  the  railroads  are  satisfied  as  a  whole  with  the  Transporta- 
tion Act  of  1920.  The  failure  to  earn  a  fair  return  on  invest- 
ment under  the  "  statutory "  rates  and  the  heavy  falling-off  of 
traffic  should  not  be  taken  as  evidence  that  the  Act  is  ineffective 
in  solving  the  railroad  problem.  The  blame  for  the  failure  lies 
with  the  Railroad  Administration.  This  governmental  agency, 
through  its  disruption  of  railroad  operating  methods  and  tradi- 
tions, through  its  wasteful  policies  and  through  its  national 
agreements  with  railroad  labor  organizations,  has  saddled  a 
burden  on  the  companies,  which  they  are  not  able  to  shuffle  off 
without  difficulties  and  delays.     Moreover,  the  increased  rates 


No.  3]      PRACTICAL  TESTS  OF  THE  TRANSPORTATION  ACT      385 

granted  by  the  Interstate  Commerce  Commission  last  August 
have  not  balanced  the  higher  wage  rates  granted  at  the  same 
time  by  the  Labor  Board,  for  while  labor  costs  increased  115 
per  cent  the  gross  revenues  increased  54  per  cent.  As  labor 
costs  consume  approximately  70  per  cent  of  railroad  revenues, 
there  is  thus  a  considerable  gap  between  income  and  outgo. 

Briefly,  the  testimony  of  Mr.  Julius  Kruttschnitt,  President  of 
the  Southern  Pacific  Company,  and  the  other  railroad  execu- 
tives who  followed  him  as  witnesses  before  the  Senate  Commit- 
tee, resolves  into  the  following  points : 

(1)  Heavier  railroad  operating  costs  are  not  caused  by  lower 
efficiency,  since  statistics  show  that  in  1920  an  increased  volume 
of  freight  traffic  was  carried  with  fewer  freight  train-miles. 
Moreover,  the  miles  run  per  freight  car  per  day  were  greater  in 
1920  than  in  19 19  or  19 18  (years  of  government  operation), 
and  the  average  tonnage  per  loaded  freight  car  was  also  greater. 
Nothing  is  said,  however,  regarding  the  costs  by  which  these 
results  were  obtained.  Statistics  indicating  efficiency,  to  be 
conclusive,  should  be  accompanied  by  figures  proving  economy 
in  operations.  Heavier  train  loads  and  high  speed  may  be 
directly  opposed  to  lower  costs  and  greater  profits. 

(2)  The  national  labor  agreements  inherited  from  the  Rail- 
road Administration  and  continued  in  force  after  the  return  to 
private  ownership  not  only  caused  pronounced  and  excessive 
wage  advances,  but  because  of  strict  classifications  of  employees, 
the  elimination  of  piece  work,  and  the  adoption  of  "  union 
rules  "  and  regulations  also  caused  higher  and  disproportionate 
labor  costs.  Consequently,  wage  payments  are  tending  to  con- 
sume more  and  more  of  the  railroad  dollar. 

(3)  The  poor  physical  condition  of  the  railroads  and  their 
equipment  at  the  close  of  government  operation  necessitated 
heavy  maintenance  expenditures  and  at  the  same  time  handi- 
capped the  lines  in  the  efficient  and  economical  performance  of 
the  transportation  service.  The  operating  cost  per  unit  of  traffic 
under  these  circumstances  would  naturally  be  in  excess  of  the 
cost  under  normal  conditions. 

(4)  The  scattering  throughout  every  section  of  the  country 
of  the  railroad  cars  owned  by  the  individual  companies  during 


o«6  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

the  period  of  government  operation  resulted  in  a  large  move- 
ment of  empty  cars  when  each  company  began  to  draw  its  roll- 
ing equipment  to  its  own  lines.  This  extra  expense,  together 
with  the  necessity  of  repairing  equipment  that  had  been 
neglected  and  misused  by  the  leasing  lines,  resulted  in  a  con- 
siderable addition  to  total  railroad  operating  expenses. 

(5)  Through  an  accumulation  of  restrictive  legislation,  such 
as  the  "long  and  short  haul"  clause  of  the  Interstate  Com- 
merce Act,  the  Panama  Canal  Act  (taking  away  from  the  rail- 
roads the  control  of  steamship  lines)  and  similar  measures,  the 
railroad  companies  have  not  been  able  to  meet  the  competition 
of  other  transportation  agencies.  Hence  they  have  lost  traffic. 
The  increasing  use  of  motor  trucks  (operating  without  cost  of 
right-of-way  or  of  any  fixed  investment)  is  also  causing  serious 
losses  of  short-haul  traffic.  It  is  thus  the  complaint  of  the  rail- 
road executives  that  the  services  of  their  companies  are  unjustly 
discriminated  against. 

Ill 

What  are  the  remedies  for  the  existing  unfavorable  condi- 
tions? The  railroad  executives  in  their  testimony  suggest 
several  changes  in  national  railroad  policy,  some  of  which  are 
not  likely  to  meet  with  congressional  sanction.  The  executives, 
be  it  remembered,  offered  no  serious  opposition  to  the  re- 
cently enlarged  powers  of  the  Interstate  Commerce  Commis- 
sion, preferring  this  concentrated  control  to  conflicting  and  an- 
noying state  regulation.  The  present  railroad  opposition  to  ad- 
ministrative control  is  confined  largely  to  the  enforced  subjec- 
tion to  obnoxious  labor-union  rules.  It  is  proposed,  therefore, 
by  the  railroad  executives  that  the  iTabor  Board  permit  a  prompt 
return  to  pre-Federal-control  working  conditions.  In  the  words 
of  Mr.  Kruttschnitt : 

It  is  imperative  to  remove  the  waste  and  inefficiency  fastened  upon 
the  railroads  by  rules  and  working  conditions  made  by  men  who  were 
indifferent  to  the  future  of  the  properties,  and  in  the  negotiation  of 
which  railroad  owners  had  no  voice.  It  is  an  essentially  preliminary 
step  in  any  effort  toward  the  realization  of  conditions  which  make  it 
possible  for  the  railroads  to  live. 


No.  3]      PRACTICAL  TESTS  OF  THE  TRANSPORTATION  ACT      387 

Other  proposals  of  relief  comprise  the  repeal  of  the  "  full 
crew  "  laws  and  other  state  and  Federal  statutes  saddling  addi- 
tional operating  costs  on  the  carriers.  Discriminations  against 
the  railroads  in  favor  of  water  carriers  should  be  removed  and 
the  "  long  and  short  haul "  clause  of  the  Transportation  Act 
repealed  or  modified.  Rate  adjustments  covering  single  com- 
modities or  groups  of  commodities  should  be  made  when  there 
is  evidence  that  the  increased  rates  have  diminished  traffic  or 
have  interfered  with  established  market  competition. 

Wage  reductions,  changes  in  working  conditions  and  adjust- 
ments of  rates  for  the  production  of  greater  revenues,  however, 
do  not  promise  sufficient  financial  relief.  Economic  wastes  in 
railroad  operations  require  elimination.  As  Mr.  S.  Davies 
Warfield,  President  of  the  National  Association  of  Owners  of 
Railroad  Securities,  has  pointed  out,  American  transportation 
has  outgrown  the  system  under  which  it  now  operates  and  only 
a  recognition  of  this  fact  "  will  save  them  [the  railroad  com- 
panies] from  being  swallowed  up  in  the  demoralization  that 
Government  operation  and  after-war  readjustment  has  brought 
on  them."  The  Security  Owners,  through  Mr.  Warfield,  ac- 
cordingly have  proposed  a  plan  of  coordination  of  services  and 
facilities  under  Government  supervision.  It  is  not  expected 
that  the  general  approval  of  this  plan  by  many  railroad  execu- 
tives and  by  the  public  will  be  received  immediately,  but  what- 
ever action  is  finally  taken,  it  is  an  undisputed  fact  that  intensive 
and  unhampered  economy  is  needed  to  save  the  roads  from 
general  bankruptcy  and  ultimate  government  operation. 

The  proposals  of  the  National  Association  of  Owners  of 
Railroad  Securities  were  brought  before  the  Senate  Committee 
in  the  testimony  of  Mr.  S.  Davies  Warfield  and  Mr.  Forney 
Johnston,  president  and  counsel  respectively  of  the  Association. 
Testimony  to  the  same  effect  was  also  presented  by  Mr.  Walter 
Fisher,  a  member  of  President  Taft's  Railroad  Securities  Com- 
mission, Mr.  John  F.  Wallace,  a  distinguished  railroad  engineer, 
and  Mr.  W.  A.  Colston,  Director  of  Finance  of  the  Interstate 
Commerce  Commission.  Mr.  Warfield's  plan  as  outlined  in  the 
testimony,  proposes  the  creation  of  a  national  railway  service 
board  to  act  in  cooperation  with  and  under  the  supervision  of 


^88  POLITICAL  SCIENCE  QUARTERLY        [Vol.  XXXVI 

the  Interstate  Commerce  Commission.  This  board  is  to  be 
composed  partly  of  railroad  officials  selected  from  among  the 
territorial  groups  of  railroad  officials,  and  partly  of  other  citi- 
zens, preferably  experienced  business  men  and  financiers.  In 
each  territorial  group  there  is  to  be  an  advisory  board  presided 
over  by  a  member  of  the  national  board.  The  national  board 
is  to  be  subdivided  into  two  separate  divisions :  ( I )  the  finance 
and  administrative  division,  and  (2)  the  railway  officials  division. 
The  finance  and  administrative  division  is  expected  to  be  com- 
posed of  officials  of  leading  life-insurance  companies,  savings 
banks,  investment  and  business  institutions  having  a  direct 
interest  through  ownership  of  securities  or  otherwise  in  the 
welfare  of  the  railroad  companies.  The  railway  officials'  divis- 
ion is  to  be  composed  of  members  serving  on  the  divisional 
railway  boards,  who  are  to  be  elected  by  the  carriers  in  the 
respective  groups,  with  the  approval  and  confirmation  of  the 
Interstate  Commerce  Commission.  All  decisions  of  the  board 
or  of  the  divisional  groups  in  matters  over  which  the  Commis- 
sion now  has  jurisdiction  under  the  Transportation  Act  will  be 
under  the  regulatory  supervision  of  the  Interstate  Commerce 
Commission. 

The  primary  purpose  of  the  plan  is  the  coordination  of  rail- 
road service  and  railroad  expenditures  in  order  to  eliminate  the 
economic  wastes  of  transportation  and  to  encourage  and  facili- 
tate the  joint  use  of  railroad  property  for  public  convenience 
and  economy.  The  proposed  new  organization,  therefore,  would 
take  the  place  of  the  present  numerous  voluntary  railroad  ope- 
rating associations  and,  at  the  same  time,  relieve  the  Interstate 
Commerce  Commission  of  much  direct  regulatory  and  super- 
visory work  recently  saddled  on  it  by  congressional  legislation. 
If  successful,  the  plan  would  avoid  evils  of  direct  Federal  rail- 
road control  and  operation,  of  which  the  nation  has  had  a  sad 
experience  during  the  late  war. 

An  illustration  of  effective  cooperation  of  the  railroads  and 
the  Interstate  Commerce  Commission  in  the  provision  of  ade- 
quate standardized  equipment,  is  found  in  the  National  Railroad 
Service  Corporation,  an  organization  created,  through  amend- 
ment of  the  Transportation  Act,  under  the  joint  auspices  of  the 


No.  3]      PRACTICAL  TESTS  OF  THE  TRANSPORTATION  ACT      389 

Interstate  Commerce  Commission  and  the  National  Association 
of  Owners  of  Railroad  Securities.  This  corporation  was  formed 
to  finance  the  purchase  of  new  rolling  equipment  for  the  rail- 
roads which  were  unable  to  borrow  at  reasonable  rates  in  the 
general  money  market.  Under  the  plan  of  financing  adopted, 
the  Interstate  Commerce  Commission  advances  from  the  re- 
volving fund  provided  under  the  Transportation  Act,  forty  per 
cent  of  the  cost  of  the  new  equipment.  The  remaining  sixty 
per  cent  is  furnished  by  the  Service  Corporation  in  exchange 
for  a  like  amount  of  equipment  trust  obligations  of  the  borrow- 
ing railroad  maturing  over  a  period  of  fifteen  years.  As  security 
for  the  government's  share  of  the  financing,  there  are  deposited 
with  the  Commission,  "  deferred "  or  second-mortgage  notes 
having  the  same  maturity  dates  as  the  first-mortgage  equipment 
trust  certificates.  The  latter  are  sold  to  investors  and  financial 
institutions.  Several  of  the  large  insurance  companies  now 
hold  large  blocks  of  these  securities.  The  National  Railway 
Service  Corporation  is  a  non-profit-making  organization,  merely 
acting  as  the  agency  of  the  Interstate  Commerce  Commission 
in  the  matter  of  loans  to  railroads  for  the  purchase  of  equipment. 
Among  the  specific  problems  facing  an  organization  created 
with  a  view  to  eliminating  wastes  and  to  encouraging  and  pro- 
moting further  economies  in  railroad  operation,  are  those  relat- 
ing to  (a)  the  standardization  and  use  of  equipment,  (b)  the 
joint  use  of  shops,  yards  and  terminals,  (c)  the  cooperative 
purchase  of  supplies,  and  (d)  the  harmonizing  of  traffic  rela- 
tionships. Many  of  these  matters  are  under  the  jurisdiction  of 
the  Interstate  Commerce  Commission,  but  it  is  readily  apparent 
that  a  governmental  agency  such  as  the  Commission,  acting  in 
both  a  judicial  and  executive  capacity,  is  incapable  of  adequately 
handling  these  problems  without  the  direct  assistance  and  co- 
operation of  an  organization  composed  of  active  railroad  ope- 
rating officials  and  practical  businessmen.  Should  the  railroads 
themselves  not  effect  such  an  organization  satisfactorily  to  all 
concerned,  (including  the  Commission,  security  owners,  shippers 
and  the  public),  it  may  be  found  advisable  to  create  by  statute 
as  an  agency  of  the  Interstate  Commerce  Commission  a  board 
of  cooperation  and  research  such  as  has  already  been  appointed 


39o  POLITICAL  SCIENCE  QUARTERLY 

by  Mr.  Warfield's  organization.  This  board  should  be  concerned 
primarily  with  broad  problems  of  railroad  operation  and  eco- 
nomic policies,  and  in  its  advisory  capacity  could  propose  to 
the  Commission  desirable  operating  changes  and  rate  adjust- 
ments which,  under  the  existing  competition  among  individual 
carriers,  are  frequently  held  in  abeyance. 

Experience  has  proven  that  the  country  cannot  look  to  a 
thousand  or  so  railroad  executives,  about  200  alone  represent- 
ing the  larger  systems,  to  reach  agreements  and  conclusions 
among  themselves,  respecting  the  coordination  of  facilities  and 
service,  or  the  introduction  of  economies  essential  to  guarantee 
the  most  efficient  administration  and  methods  of  transportation 
under  private  management.  Unless  these  conditions  are  recog- 
nized and  relieved  through  definite  authority  the  most  approved 
provisions  of  the  Transportation  Act  of  1920  will  be  rendered 
ineffective.  And  if  the  interest  of  railroad  security  owners  were 
alone  considered,  it  might  be  better  for  them  to  have  the  lines 
taken  over  by  the  government  and  paid  for  under  fair  methods 
for  determining  their  value  rather  than  that  there  should  be  a 
continuation  of  the  present  unsatisfactory  railroad  conditions. 

A.  M.  Sakolski. 
New  York  City. 


